A Cheaper Dollar Means Other Countries Have To Get Their Economic Houses In Order

Bush’s Dollar Gamble (washingtonpost.com)
It’s a little misleading to suggest the Bush Administration has been pushing the dollar lower. It’s more accurate to say that they have quit propping it up artificially and are willing to let the market determine the dollar’s value. Short of a free-fall or catastrophe, I would have to agree.

Samuelson’s basic argument is that if we let the dollar fall against other currencies we’ll be relying on other countries to not turn protectionist and that their economies must grow without the help of the United States. That’s exactly what should happen. For all of the 1990’s the rest of the world relied on the U.S. and its large trade deficit to cover for structural problems in their own economies. No more. With a weaker dollar they won’t be able to rely on the U.S. for growth and will have to tend to their own economies. Good.

Call it the dollar gamble. A cheaper dollar is the Bush administration’s latest economic attack plan. The target: the ailing manufacturing sector. For 33 straight months, factory employment has dropped; the 2.3 million lost jobs have swamped modest gains elsewhere. A manufacturing revival might improve the job market — and confidence. Although manufacturing suffers from many problems, chiefly the collapse of business investment, a rising trade deficit ($484 billion in 2002, up from $77 billion in 1991) hasn’t helped.

The cheaper dollar aims to change that. A year ago, the euro was worth only 92 cents; now it’s $1.16. This means that European exporters (whose costs are in euros) must raise their dollar prices, reduce profits or accept a loss. Canada is the largest U.S. trading partner. Over the past year, the Canadian dollar has risen 12 percent (from 65 to 73 cents). Similarly, the yen has jumped 9 percent. Against the currencies of major U.S. trading partners, the dollar has fallen 9 percent since early 2002, calculates the Federal Reserve.

The administration isn’t precisely guilty of manipulating the currency markets for political purposes. For years, economists have predicted that the dollar could fall. The growing U.S. trade deficit, now equal to almost 5 percent of U.S. gross domestic product, flooded the world with dollars. Foreigners might not want to hold all the dollars they received from their exports. Then, dollars would be sold for euros, yen and other currencies. Indeed, the dollar’s decline began last fall. But the administration hasn’t discouraged the shift. Just the opposite. Treasury Secretary John Snow has signaled that he favors a cheaper dollar.

I favor a dollar set at a market rate unless catastrophe strikes calling for major intervention. It only makes sense and is better for all concerned in the long run.

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