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Economic attention easily focuses on the USA because America has a far more open economy than Europe. According to reports, German GDP growth has fallen below 2%; this may be typical of European economies. Europe, with its excessively rigid bureaucracies, is less flexible than the USA. In a global downturn, this flexibility will matter.
The dollar is the world's money. Some 70% of the world monetary base is held in dollars. Devaluing the dollar therefore reduces the global money supply, adding to the pressures faced by businesses. One obvious effect is that interest rates will resume their fall. Another is that high quality bond markets prosper - Gilts and US Treasuries have been notably stronger in recent weeks.
For sterling based investors, the rise in US Treasury Bond prices has roughly offset the currency decline. The rise in the Euro is a transient rally which must unwind when the relative weakness of Europe becomes apparent. The decline in the dollar will stabilise once a real flight to safety emerges. Meanwhile, the pound sterling has turned into an even more vulnerable currency. Why? Because the formula of spending ever more borrowed money must eventually damage British competitiveness.
These are the fundamentals. They are not short term trading hints. Rather, they should make you think about the real long term determinants of currencies.
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