5 Cents – United States

In 2006, the United States currency situation was characterized by a period of relative stability for the U.S. dollar on foreign exchange markets, but underlying concerns about long-term fiscal health were growing. The dollar experienced a modest decline against major currencies like the euro, but this was part of a controlled, multi-year adjustment rather than a crisis. This environment was largely shaped by the Federal Reserve, which, under Chairman Ben Bernanke, had concluded a two-year cycle of interest rate hikes, bringing the federal funds rate to 5.25% by mid-year. This policy aimed to cool an overheating housing market and contain inflationary pressures, which were being fueled by high energy prices.

Domestically, the economy was in a transitional phase. While GDP growth remained positive, the housing market—which had been a primary engine of growth—was showing clear signs of peaking and beginning its downturn. The subprime mortgage crisis was emerging but was not yet recognized as a systemic threat. Inflation hovered around 3-4%, driven largely by rising costs for oil and commodities, which kept the Federal Reserve vigilant about price stability even as growth showed signs of moderating.

Looking outward, the U.S. continued to finance significant current account and trade deficits through substantial capital inflows from foreign investors and central banks, particularly from Asia. This "global savings glut" helped maintain demand for dollar-denominated assets like Treasury bonds, keeping long-term interest rates relatively low despite Fed tightening. However, economists and policymakers increasingly warned that these persistent imbalances—large deficits coupled with rising debt—posed a risk to the dollar's value and global financial stability in the longer term, setting the stage for the severe stresses that would emerge in 2007-2008.