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US dollar politics
raymondusa Updated: 2004-12-02 09:49 It's understandable that US
wants to allow the dollar to fall, partly to help with the current account
deficit. As the dollar falls, it makes US exports cheaper, and US imports more
expensive. It theory, that would be a good thing for US, but unfortunately,
that's shortsighted.
Even with the dollar falling, and US gaining a currency premium, it still
will have a very difficult time competing in the international market. Yes,
short term, this strategy should cut the current account gap somewhat, but at
what cost? Depending on what product we are talking about, the cost difference
is in some cases up to 80% less. A currency premium isn't going to overcome
those cost differences.
The other problem with allowing the dollar to fall is that it will hasten the
exodus of other countries to use Euros and invest elsewhere as the confidence in
the US economy continues to wane. As more countries use Euros as the de facto
reserve, the US dollar becomes less attractive, and therefore, more costly to
attract foreign investments, thereby forcing Greenspan to increase long term
interest rates, which makes financing the debt more and more costly in the long
run.
In sum, if US continues to allow the dollar to fall, it will help current
account deficit, but will make long term financing of US huge debts even more
costly. If US doesn't take action to support the dollar, don't be too surprised
that more and more countries will rebalance their portfolios away from US
dollars, making future borrowing even more costly. The anvil on the neck of US
is the debt and deficit.
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