"There is only one alternative to the dollar" in the January 5 Financial Times is an interesting discussion of the fate of the USD as reserve currency. I find the following quote interesting:
If the US stimulus policy revives the economy by spring or summer, the dollar could rally further. The risk posed by US policy comes from potential market concerns about monetary policy becoming inflationary. The current growth rate of the Fed’s balance sheet is totally unprecedented.
A similar sentiment has been expressed in yesterday's WSJ (did you come across this?)
As discussed in the Relative Purchasing Power class discussion, if the inflation rate in the U.S. will exceed that of other countries, exchange rates should reflect this difference through a depreciated dollar. It is possible though that the Fed will react by raising interest rates. This, according to the Interest Parity Relationship should result in a stronger dollar. So, should we expect the USD to depreciate (high expected inflation) or to appreciate (higher interest rates)? Who knows.
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