| Hitting Bottom Yet? |
26 May 2003
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Dollar's Slide Poses Global Problems
The US dollar has been in decline relative to other currencies for some time now, and it has lost about 25% against the euro and the yen in the last year or so. Secretary of the Treasury Snow abandoned any "strong dollar" policy last week -- saying a stong dollar meant one that people wanted to use as a store of value (almost every currency on the planet meets this standard). The problem is this weakness will cause global problems, and the Bush administration is doing nothing about it.
To be fair, there is little a government can do except in the shortest and longest terms to affect currency rates. Market interventions and interest rate changes do affect short-term pricing, and deficit and national debt management can affect things years down the line. However, in the medium-term, trade and tax policy can have some effect, but have been abandoned for ideology in Washington both among Republicans and Democrats.
America could change capital flows to strengthen the dollar if it were to raise tariffs and promote job creation in the US, rather than profits creation by job export. However, Wall Street is better represented in Washington than Main Street.
The failure to prevent the dollar's free-fall will force Germany into deflation (where Japan has been for ten years), and will stifle European growth as it does so. This will harm US exports, even as the sliding dollar makes US goods more attractive to European consumers -- the Europeans will have less to spend. Longer term, it will increase US interest rates at a time when demand for capital will be raising them anyway. The result could well be under-investment that does damage for years to come.