As panic and de-leveraging in the global credit markets subsided amid some tentative early signs of stabilization of the world economy, the dollar weakness takes the centre stage. Key commodity and emerging currencies gained amid hopes for global recovery. The breakdown of the US dollar would magnify the global financial and economic slump, leading to extreme volatility in capital flows and exchange rate. The "dollar trap" syndrome has many investors and policymakers worried about its future resolution. This concern is strongly justified as the rising debt burden of the US government threatens its sovereign creditworthiness and if accompanied by a slumping dollar, this could precipitate a currency crisis. Only a combination of structural change in the US (deleverage and rebuild precautionary savings) and abroad (Asia with its surplus savings needs to boost investment, raise consumption, allow the exchange rate to appreciate), along with a gradual dollar depreciation will help to rebalance the global economies.
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