Question

Most analysts think that the US$ was overvalued in the 1990s and 2000s. This is certainly suggested by the persistent trade deficits run between the US and the rest of the world. What accounts for the persistent high value of the US$? What impact does the high value have on GDP and inflation in the US?

Answer 1

Ans

Yes it is true that the US $ was overvalued during the period of 1990 and 2000. And this was clearly evident based on the trade deficits between US and major other countries specially with China the trade deficit was very high.  

The key reason for the overvalued US $ was the continuous flows of money into the US economy with the expectations that the economy will do well. Even after the dot com bubble of 2000 the flows continued constantly chasing investment into US market and in many ways it can be compared to Japan in 1990.
Also another reason was the high levels of consumption in the US . The saving rate was very low and high consumption kept the imports high even though they were more expensive.

The high value of US $ will make the imports more expensive and the exports will be less attractive in the international trade that will increase the trade deficit.
Also it will lead to lower GDP and if the economy is doing well the overvalued dollar can help to keep inflation in check but in downturn it will create the risk of deflation.