Can a dollar devaluation be avoided?

Recent days have seen the dollar sink further against both the euro and sterling. Meanwhile, America's trade deficit continues to grow. Is a balance of payments crisis on the cards?

Whilst attention this week has focused on a mega bid in the Mining sector, the continuing fall-out from the US sub-prime market, both in terms of threatened downgrades from credit ratings agency Standard & Poors and from high profile, but far from surprising, profit warnings from US retailers Home Depot and Sears Holdings, our attention has turned once again to the ailing dollar.

Regular readers of the Week In Preview will know that our strongly held belief is that a full scale US balance of payments crisis is only being prevented by the unprecedented generosity of overseas (largely Asian) central banks. Their high and rising dollar surpluses are destined either to increase at an increasing rate (due to the ongoing deterioration in US competitiveness relative to the likes of India and China), or lead to a massive dollar devaluation. The combination of rising oil price and abundance of dollars is forming the basis of an unhealthy and potentially explosive cocktail.

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