Down with the dollar?

For much of 2009, the dollar has fallen in value against the euro. In the middle of October, the common European currency was worth more than $1.50 for the first time in 14 months.

What was your reaction to the dollar's decline?

• This reflects the fact that investors felt more confident about the world economy and so there was less need to invest in the dollar, the world's "safe haven" currency.
• A lower dollar is a necessary part of the structural rebalancing of the world's major economies, which will help the US to reduce its large balance of payments deficit.
• A lower dollar makes it cheaper to go to the US on holiday.
• The decline reflects the fact that America's power in the world is decreasing and, besides, it serves the country right for being so arrogant politically and militarily.

Maybe you shared a number of these views. But what constantly amazes me is how many people still have a macho attitude towards exchange rates.

According to this view, a higher exchange rate is always a good thing, a sign of power. Those who oppose the political and militaray power of the US seem to enjoy a sense of enormous schadenfreude every time they see the dollar falling.

I don't want to spoil these people's fun, but the exchange rate is not a verdict on political and military policies. It is primarily an economic variable. This means that the first two comments above are the best ones. (Of course, a lower dollar does make it cheaper to go the US on holiday, but that is hardly an important economic factor.)

When there is uncertainty, investors run to the safety of the dollar. When investors are more relaxed, as they have been since March this year, they turn to riskier investments.

The lower dollar is also necessary to help the US economy to recover. On the other hand, exporters in the eurozone countries will struggle with their higher exchange rate.

Most experts agree that an orderly decline in the dollar, as we have seen this year, is positive for both the US economy and the world economy. Only a further panic run on the greenback would be a cause for serious concern. And in the medium term, we can even expect the dollar to rise again against the euro.