Although the business cycle has not disappeared, flexibility has made the United States and the United Kingdom, and much of the remainder of the global economy more resilient to shocks and more stable during the past couple of decades.  Nonetheless, the piling up of dollar claims against US residents is already leading to concerns about concentration risk.  Although foreign investors have not as yet significantly slowed their financing of US capital investments, since 2002, we have observed a decline in the value of the dollar and a reduction in the share of dollars in global cross-border portfolios

The value of the dollar declined somewhat last year, but has appreciated thus far this year. It seems that foreigners, including both private investors and central banks, have been more willing to hold dollars than we anticipated.

These phenomena [the growing current account deficit, dwindling household savings, low level long-term interest rates and the rapid pace of house price increases] could well continue for some time longer, but they are not sustainable indefinitely. At some point, global investors will require higher expected rates of return as their portfolios become increasingly concentrated in dollar assets; house price increases will encounter resistance as they rise relative to income and rents; as housing prices level out, households will recognize that they must increase saving out of income to have adequate resources for retirement; and the Federal Reserve already has been raising short-term interest rates as demand recovers from the shocks of recent years.

Over the past several years, economists have been expecting the decline in the value of the dollar to bring stability to the trade picture. This began in earnest in the second half of last year.

The dollar has declined.  If you look in a historical context, it is lower.  That has been a benefit to much of US manufacturing in terms of global competition.

I think the dollar is a reflection of our economy and our deficit...as we address these issues, it will remain and is the world's reserve currency, and should be.

I do not anticipate a marked and persistent downshift in U.S. productivity growth that would greatly reduce the expected returns from holding dollar-denominated assets. 

The larger the current account deficit becomes, the greater the number of observers who believe that a correction, and one with significant implications for the U.S. economy, is imminent. Such expectations have contributed to, and in turn have been reinforced by, the slide in the dollar over the past few years.

Some of the largest industrial economies in the world--Japan and the euro area--have been running current account surpluses while experiencing very subdued growth...By depressing perceived rates of return abroad, the weakness in foreign demand explains a considerable portion of the run-up in the dollar

The recent decline in the value of the dollar may lessen the competitive pressure on domestic producers that has until now limited their pricing power.

Now, it seems that investors are becoming less willing to channel so much of their savings into additional dollar-denominated instruments going forward. And some have suggested that they are beginning to diversify into other currencies, like the euro. This has caused the dollar to depreciate against other currencies.

I'm not anticipating a significant acceleration in inflation this year, or even a significant building of inflationary pressures...[But] I do think that anecdotes, which I think line up pretty much with the decline in the dollar we've seen over the past few years, suggest to me the environment maybe isn't quite as competitive as it was, say a couple of years ago.  And that may mean that there's more possibility for raising prices.  It doesn't mean that it's actually going to happen.

The dollar has depreciated a little bit, but in the scheme of things, the dollar has been pretty stable over the years and yet the current account deficit has risen to historic proportions...The way in which you can make these two things fit together, within a perspective that involves informed market behavior, is this demographic perspective that I tried to sketch today.

The pass through [of import costs] has diminished...But the weaker dollar does change the competitive landscape. It means foreign producers are not as competitive as they...were and, other things being equal, that may contribute to more [US] inflation.

The recent somewhat quickened pace of increases in US import prices suggests that profit margins of exporters to the United States have contracted to the point where foreign shippers may exhibit only limited tolerance for additional reductions in margins should the dollar decline further.