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Don’t worry about the weak dollar
By John M. Berry
There’s no way to shut off the incessant warnings about a weak dollar from foreign officials and some economists, but it’s perfectly safe to ignore them.
You can also yawn the next time Treasury Secretary Timothy Geithner repeats the mantra, “It is very important to the United States that we continue to have a strong dollar.”
Everybody is blowing smoke.
Those complaining in Europe, Japan, Canada and elsewhere are worried that a cheaper dollar will further damage their already declining exports, making their ailing economies worse.
The reality is that the dollar’s more or less continuous decline against other major currencies since the beginning of 2002 has helped cut in half the huge U.S. deficit in trade and financial transactions with the rest of the world. That deficit peaked in 2006 at just over $800 billion, almost 6 percent of GDP.
Even though millions of Americans have lost their jobs during the severe recession triggered by the financial crisis, without the weaker dollar, many more would have disappeared. The cheaper dollar has helped reduce demand for foreign-made goods and services at home while making U.S. exports more competitive abroad.
The recession itself has played in trimming the deficit by reducing both overall consumption and investment.
The foreign finance ministers and central bankers, such as European Central Bank President Jean-Claude Trichet, who are unhappy about the dollar also regularly call for actions to reduce global financial imbalances, including the U.S. trade deficit. They can’t have it both ways, which they know perfectly well. So keep in mind that their dollar comments are often intended for a domestic audience whose jobs may have been lost as their exports have declined. That’s why they love to talk about a “strong dollar”.
Last week, Trichet said, “When the secretary of the Treasury and our friend Ben Bernanke say that a strong dollar is in the interest of the U.S. economy and that they are pursuing a strong dollar policy, this is a judgment that is obviously very important for us and for the global economy.”
The ECB president, however, fully understands that neither the Treasury nor the Federal Reserve is about to take any steps specifically to support the dollar.
The Fed isn’t going to raise interest rates and the Treasury isn’t going to intervene in currency markets by having the Fed buy dollars to prop up its value. Only if markets began to behave in a truly disorderly fashion might there be temporary interventions.
The dollar has dropped by a third — and never in a disorderly way — over the past seven years. Since the dollar’s peak early in 2002, the Fed first cut its target for the overnight lending rate to a low of 1 percent, kept it there for a year and then increased it steadily to 5.25 percent. After the financial crisis hit, it has lowered the rate almost to zero.
None of those decisions were directly to do with the value of the dollar. And while Chairman Bernanke and his colleagues are now discussing when it may be time to begin to raise — or to rein in any of the other steps the Fed has taken to support financial markets — you can be sure the value of the dollar will have little to do with their decision.
In the 10 years of its existence, the ECB has essentially had the same approach, focusing on controlling inflation rather than the value of the euro.
The same thing is true for the Bank of Japan, whose interest rate target is also close to zero while the yen keeps strengthening against the dollar. (The Japanese finance minister, however, has threatened to intervene in currency markets to weaken the yen and protect Japanese exports.)
China is a whole other ballgame, however. To protect its enormous trade surplus, the world’s largest, it again froze the value of the yuan compared with the dollar in the middle of last year. For several years before that, it had let the yuan gradually appreciate.
But keeping the yuan-dollar rate frozen while the dollar declined against most other currencies meant that the yuan also declined against most other currencies. None of the affected nations has a way to force the Chinese to change their policy. This is one instance in which just about everyone wishes the dollar would weaken much further.
At some point, a weaker dollar could add to inflationary pressure in the U.S. by contributing to higher prices for imports — but that’s a problem for the future.
Right now, a weak dollar is not a bad thing at all.