Question

During the U.S. financial crisis of 2007 the U.S. government pursued an expansionary macro economic policy. The role of government expanded and huge sums of money was pumped into the economy. On top of that the Federal Reserve lowered interest rates to historical lows in order to create liquidity in the credit markets.

At the time, Germany stated the United States is forcefully lowering the value of the dollar by pumping more money into the economy and the Fed's action is no different than China manipulating the yuan. The EU feared the U.S.'s monetary easing will put increased pressure on weak European economies (the PIIGS - Portugal, Ireland, Italy, Greece, & Spain) and cause their currencies to appreciate in relation to the dollar.

Emerging market nations (India, China, Vietnam, Thailand, and South Korea) believed the lowering of the value of the dollar would cause huge captial inflows that risked creating inflation in their economies.

Was Germany and Europe's concerns valid? Should the rest of the world fear the possibility of the dollar being valued less than their home currencies?

Answer 1

The expansionary monetary policy adopted by United States aftermath of Sub-prime crisis/financial crisis created a lot of cheap money which landed in some of the European and Asian countries where returns are higher in the form of foreign portfolio investments. This is equivalent to the devaluation of Chinese Yuan in order to boost exports and receiving countries feared once interest tends to start to increase, it put pressure on foreign exchange reserves of the country. When foreign portfolio investment due to quantitative easing and extreme ease of monetary policy flows to other nations, the demand for that country's currency increases making exports an unattractive terrain. This will offset the current account and those running current account deficits thus had a reason to worry due to easy monetary policies followed by U.S aftermath of financial crisis.