Why the dollar is losing value
The article also has a few things to say on the impact abroad:
Behind the problems of the dollar lies the huge and growing US trade deficit, and the large Federal budget deficit... That [trade] deficit is now heading above $800bn for 2006, or 7% of the US economy, and shows no signs of diminishing...
Together, the East Asian countries have accumulated foreign currency surpluses of nearly $1 trillion, much of it held in US Treasury bonds denominated in dollars.Thus they are funding both the budget gap and the trade gap. ... The classic economic view of how to correct such changes is to adjust the exchange rate in order to make US goods cheaper and Asian goods more expensive.
The article points to a certain deja vu in the situation:...foreign companies who have derived an increasing proportion of their sales and profits from the US market could also be hit by falling demand for their exports.
The sharp falls in non-US stock markets, especially in Asia, are a response to this fear, with electronics and car companies like Toyota and Sony especially vulnerable.
And that in turn could affect the growth rate of countries like China, who derive much of the growth in their economies from exports.
...The Asian governments and investors may be tempted to sell many of their dollar holdings in order to protect themselves - but this would have the effect of weakening the dollar further.
And it would force the Fed to raise interest rates even more to protect the dollar.
This problem with the dollar has happened before, in the 1980s, when it was Japan rather than China that was seen as the main threat.
At that time, the main industrialised countries worked together for a managed currency float in an agreement called the Plaza Accord.
The coordinated approach led to a managed decline in the value of the dollar, which then stabilised at a more sustainable level, supported by central banks.
But the writer does not yet see such a scenario emerging:
...the current US administration does not favour such an approach, believing that the markets should be left to their own devices.For further reading, check out Stephen Roach, Martin Wolf, Nouriel Roubini, and some of the other columnists and bloggers (see links on the right). Paul Krugman also wrote a lengthy piece on the question of "Will there be a dollar crisis?" back in April 2006. He can't help himself from being a bit of a naysayer. From his conclusions:And given the vast size of foreign currency markets today, it is doubtful that central banks could make such an effective intervention again.
it seems likely that there will be a Wile E. Coyote moment when investors realizeTo put his comments in context, it's worth checking out his July 20, 1999 piece in Slate "Don't Laugh at Me Argentina: Serious Lessons from a Silly Crisis"
that the dollar’s value doesn’t make sense, and that value plunges.
The case for believing that a dollar plunge will do great harm is much less secure. In the medium run, the economy can trade off lower domestic demand, mainly the result of a fall in real housing prices, for higher next exports, the result of dollar depreciation. Any economic contraction in the short run will be the result of differences in adjustment speeds, with the fall in domestic demand outpacing the rise in net exports.
The United States in 2006 isn’t Argentina in 2001: although there is a very good case that the dollar will decline sharply, nothing in the data points to an Argentine-style economic implosion when that happens. Still, this probably won’t be fun.
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Despite Euro's Gains on Dollar
By JOELLEN PERRY
November 29, 2006; Page A6
European policy makers are betting industrial competitiveness and economic growth outside the U.S. will keep Europe's exports strong despite the euro's recent run-up against the dollar and the yen.
The common currency yesterday hit a fresh 20-month high of $1.3210 against the dollar and hit a record against the yen. The breaches have prompted strong complaints from French politicians, but fairly muted reaction elsewhere.
[Chart]
At a meeting of euro-zone finance ministers yesterday, Luxembourg Prime Minister Jean-Claude Juncker, also the group's chairman, said, "the current euro exchange rate is not a cause for concern."
Similar messages have come from Nout Wellink, the Dutch central-bank governor and a member of the European Central Bank's rate-setting governing council, Unice, a federation of European businesses, and the International Monetary Fund.
The relatively muted reaction is in stark contrast to the last time the euro surged on the dollar, in December 2004, when it hit a high around $1.36. Around then, ECB President Jean-Claude Trichet called the movements "brutal" and "unwelcome."
A stronger currency generally makes a nation's exports less competitive and dents corporate profits. In 2004, economic growth in the euro zone, and much of the world outside the U.S., was weaker, already making it harder for European companies to find buyers for their products.
Late in New York, the euro stood at $1.3198, up from $1.3126 late Monday and at 153.22 yen, up from 152.36 yen. Tough talk on inflation by Federal Reserve Chairman Ben Bernanke did little to stem the dollar's decline. The euro initially slipped after Mr. Bernanke's comments, but it soon turned around, surging to touch $1.3210.
The euro hasn't breached its 2004 high, which is partly why policy makers are taking its strength in stride. Also, while the euro is surging against the dollar and yen, its trade-weighted value against a basket of 23 trading partners hasn't steepened as sharply. Compared with December 2004, it has weakened.
"Definitely, the ECB is more interested in the trade-weighted index," says Matthew Sharratt, euro-zone economist with Bank of America in London. "They want to look at the overall impact on euro-zone competitiveness."
The U.S. is a smaller trading partner for the euro zone than the United Kingdom, which hasn't adopted the euro, and about equal to Asia and central Europe. "You'd have to see the euro strengthen by about 15% against the dollar in a very short period of time," for the trade-weighted index to hit worrisome levels, Mr. Sharratt said. This year, the euro has risen about 11% against the dollar.
Stronger growth outside the U.S. also could help euro-zone companies. Oil-fueled growth in the Middle East and Asia, where many German companies export goods, could be particularly important, says Jürgen Michels, European economist with Citigroup in London. "That other part of the world economy has started to offset, a bit, the weakness we've seen from the U.S. That means that a stronger euro versus the dollar might not be as important" now as it was in 2004.
But not all euro-zone economies will be able to weather the storm equally.
While the Italian and French economies have yet to embark on much-needed overhauls, wage depreciation and corporate restructuring has made "the Germans much more competitive than they were" in 2004, says Gabriel Stein, economist with consulting firm Lombard Street Research in London. French Finance Minister Thierry Breton has been among the few European politicians to speak out against the euro's recent rise.
Sentiment is likely to change if the euro nears its historic highs against the dollar. The Organization for Economic Cooperation and Development warned yesterday that a sharp appreciation of the euro against the dollar could stunt a euro-zone economy already expected to slow next year on the back of slower U.S. growth and domestic fiscal overhauls. A euro closer to $1.40 could prompt monetary policy makers and politicians to speak up.
Treasury's Paulson
Sounds Warning
On Protectionism
By DEBORAH SOLOMON
November 29, 2006; Page A11
LONDON -- U.S. Treasury Secretary Henry Paulson warned that protectionist sentiment is rising all over the world, partly because "the benefits of trade are not spread evenly in any part of the world." But he said it would be "morally wrong" to give in to "protectionist elements."
Mr. Paulson's remarks, in a speech to the Confederation of British Industry and in subsequent comments to reporters, echo some of the themes that have been sounded by Democratic Party critics of globalization in the U.S., and like-minded people in other countries.
In contrast with those who would seek to slow the pace of globalization and prevent the completion of the current Doha round of world trade talks, Mr. Paulson argued that it is essential that globalization continue in order to assure future prosperity of developed and developing countries.
"Giving in to protectionist sentiment," he said, "would be telling developing nations that while we have benefited from increased trade, we aren't going to allow them the same opportunity to develop." That, he said, is "not only bad policy, it is morally wrong."
In Washington, U.S. Trade Representative Susan Schwab echoed Mr. Paulson, raising alarms about the "extremes" in both major U.S. political parties that preach economic isolationism. "Those are forces we must confront in a bipartisan way," Ms. Schwab said. In an appearance before the U.S. Chamber of Commerce, Ms. Schwab vowed to work with Democrats in Congress next year.
Ms. Schwab suggested the Bush administration has made strides in already-completed trade deals to improve labor and environmental standards abroad, issues of importance to Democrats. And without offering specifics, Ms. Schwab suggested the administration needs to better respond to the needs of workers who lose their jobs as a result of foreign competition. The "dislocations are real," she said.
In London, Mr. Paulson acknowledged that trade in goods and services can eliminate jobs in the short run, especially jobs for workers with few skills. This, he said, is fueling resentment toward global trade and investment in many countries. "For over 20 years now, we've seen a trend driven by globalization: Those who have skills are getting greater rewards."
Public concern that trade is driving a wedge between winners and losers in the U.S. economy, he said, is a factor in tension between the U.S. and China. "Part of this relates to a feeling that the benefits of the trade between our two countries aren't being shared equally or fairly," he said in response to a question after his speech.
--Greg Hitt in Washington contributed to this article.
NO?? then I agree with Bush administration. if USA is not Argentina, then China is not Japan.