World Economics - Insight , Analysis and Data

World Economics - Insight , Analysis and Data
Are We Heading for a Dollar Crisis?
Graham Bird
World Economics, March 2006

The US balance of payments current account deficit is in excess of 5 per cent of GDP. Is this sustainable? A loss of confidence in the dollar could lead to foreign investors selling dollars and to a sharp dollar devaluation. In principle, there could be a dollar crisis. But how likely is it? This paper investigates the extent to which the situation in the mid 2000s mirrors that at the time of the last dollar crisis in 1971. It also examines the causes of the contemporary US current account deficit and the factors determining its sustainability. It goes on to discuss the need for policy action both within the US and in the rest of the world to minimize the risks of a dollar crisis that could have serious implications for the global economy.
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