Wednesday, April 30, 2008

Iran Dumps the Dollar

Story on CNN here. Let us quickly pass through the economics of the effect:

Decreased demand for U.S. currency --> Lower U.S. exchange rate --> U.S. goods and services become relatively cheaper --> U.S. Exports Increase, Foreign Capital Investment in the U.S. Falls

If I had to pick, I'd prefer to have higher foreign capital investments, but I'm mostly agnostic on the topic. From what I can tell (correct me if you know otherwise), the U.S. does not buy much oil directly from Iran so there will not be much in the way of higher transaction costs as buyers and sellers realign themselves. If Iran's customers are truly clamoring to pay in something other than U.S. dollars than this is likely in the best interest for all parties concerned.

Let us also remember what the value of a dollar on the global currency market largely represents, which is how confident foreigners that they can make a secure investment in our country. That will depend positively on our openness to free trade, taxes, and security.

1 comment:

Matt E. Ryan said...

Absolutely-- higher foreign capital investments is something desirable. I'm by no means a macro person, but that much I know.