Second hit – long positions on Gold futures and Gold ETFs is ensured

Going by the fact that a falling dollar will help in balancing out the imbalances is not appealing as it would have been in the past. Today we live in a globalised era and the curtains have come down significantly between economies and markets are far more deregulated. And this has narrowed the scope for correction in the trade balances through an exchange rate window. Conventionally, a depreciation in the dollar would help American exports and make imports costlier (discouraging imports) thereby, bridging the trade gap. But in the present context depreciation in dollar would hardly affect imports today as pricing power of producers have fallen significantly due to commoditisation. So, we generally do not experience any shock due to depreciation of currency thereby imports stay unfettered, subsequently having a minimal corrective effect on the current account balances. And if at all such a thing has to happen, then it would require the dollar to fall more than what it should have in the past; and this variation which is not considered might be quite high and bring the whole global financial system to its knees. Well, there can be a less violent solution to this imbalance problem.

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Source:- IIPM Editorial

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