UPDATED: I have left this post here today in the light of the $/£ hitting 2.11 today. As Newmania says in the comments below, time to do some Xmas shopping in NY
The exchange rate system in the world today is paddling against some strong tides. Many economies the world over, including China, Hong Kong, Dubai, most of Latin America and many smaller nations, have their currency pegged to the US Dollar. Even the British Pound today stormed the $2.10 mark, pity the US tourists trying to eat in Garfunkels.....
The Federal Reserve has been backed into a corner by the credit crunch and been forced into reducing interest rates even whilst some key inflationary measures are pointing upwards. This has led to a significant devaluing of the US dollar, which forces these countries to defend their own pegs by buying dollars with hard earned cash.
Some currency experts are predicting a the bottom. Indeed when Giselle Bundchen gets on this bandwagon then surely the wheels are due to come off soon.
However, in the long-term the US may well be playing a global strategy game with some success. It is quite possible to blame part of the credit crisis on the mercantilist policies of many of the rising economies and petro-economies. They have sucked in Western money and held on to it. They have not managed to raise their internal demand nor lend it back to the West in any form of finance. As such the Western Economies response was to ease credit (of course, there are other reasons that helped this decision too); but this could only go on for so long before sparking off inflation or causing a systemic shock.
Now there has been such a 'pop' to the balloon with the credit crunch.
But have the mercantilists' really won over the West? Should we all learn Mandarin and worship only to the East? Some may think so but now the rising economies are faced with massive losses on their dollar assets as it falls in value, a drop in demand from their expert markets as their growth rapidly slows and not enough domestic demand to keep themselves going if exports start to fall. On top of this the currency pegs they are trying to hold are costing them huge amounts of cash; transferred in the main to western currency speculators. Finally, with all the money having nowhere to go there are huge bubbles of their own, see the Shanghai stock market as the leading example, which are going to lose billions of dollars for unsavvy investors in the not-so-distant future.
America's inflation scenario, whilst no good for those with domestic savings (who are few in the US ), may well save their country long-term and like magic end the damaging mercantilist policies of the Middle East and Asia as they will come off currency pegs and have to somehow re-invest their dollar assets or face huge write-downs in value.
All this led by George Bush's appointee Ben Bernanke; maybe George is smart after all?