From the US perspective :
I would believe that if the Dollar is not strong in the short run, US govt can cut its trade deficit by a huge amount. It does make sense that the US government is trying to play hardball specially with China by not trying to keep the dollar strong. If the dollar is falling for sometime and Chinese decide not to keep much of the greenback and then the dollar rallies back, it could help reduce the huge deficit the US government faces presently(thanks to increase spending, rising oil prices and the subprime market losses).
Source: Economist.
US exports have increased because of a weakening dollar. Tourism is also on a rise with a cheap dollar but not for Americans travelling abroad.
How is it hurting other countries economies?
Stronger Euro means, a hit on the exports of EU countries. This could have an impact on the local economies in Europe. Increase spending might not be too good either.
Stronger local currencies like Canadian Dollar, Indian Rupee, Australian Dollar will have an impact on the exports of their local economies.
What i do fail to understand is how the cost of oil is actually not rising with a falling dollar?
The FED is trying to play a balancing role here in finding a solution so that it could some how not let the economy into recession and also try to reduce the trade deficit.
Global commodity trading is done mainly in US dollars. The world cannot risk changing the currency overnight into another currency like the euro. Such a change will have a huge impact in economies world wide. The US government is probably banking on this assumption and cannot worry about a weakening dollar atleast for the present scenario.
But, all of these advantages can screw up the economy by the sub-prime market woes. Simple fact, starting January 2008, around 3 million customers interest rates are going to take quite a jump and an increase in foreclosures can be seen. President Bush's plan to save the sub prime mortgage might not completely save the crisis.
I will try to add more to the article as i learn more about the world economy.
