What is the Risk to the Dollar?

link here to article

Critics of the Fed continue to worry about policies that they believe will erode the value of the dollar. They believe that the decline in the dollar will lead to inflation. The 10% decline in the value of the dollar has historically led to a 1% increase in inflation. The dollar has fallen by 5% and it has barely made a dent in inflation. Moreover, investors continue to purchase US treasuries at very low yields. This article makes the case that the biggest threat to the dollar is US fiscal policy. If investors believe that the inmates are running the madhouse, which is close to the truth, they might unload their dollar holdings. If that were to happen the Fed would be powerless to stop the retreat from the dollar. That is perhaps why Bernanke keeps reminding politicians that the Fed is reaching the limits of what it can do to restore the economy. He frequently states that Fed policy must be supported by fiscal policies which recognize short term needs as well as the longer term need for sustainable growth.