Should America embrace a weaker dollar?

September 24, 2009

Does Ben Bernanke care about the dollar? Larry Kudlow doesn’t think so:

Today’s FOMC policy announcement from the Federal Reserve basically sends a message that Bernanke & Co. doesn’t care one wit about the sinking dollar or the rising gold price. In fact, the latest policy directive removes last month’s reference to commodity-price increases, while there is no reference to the greenback at all. The central bank is going to keep buying mortgages and adding to its balance sheet of high-powered money creation. … The bottom line is that the Fed is going to continue to create an excess supply of new dollars, which is why the dollar exchange rate is likely to keep falling while gold and other commodities keep rising. Today’s incipient inflation will become much more pronounced in the next year or two. Helicopter Ben is not turning into King Dollar Ben. Actually, I believe the Fed and the Treasury want to nurture a cheaper dollar to boost U.S. exports as a means of fine-tuning stronger economic growth through the international channel. But there is no exit strategy from dollar creation. That’s gonna wait well into next year.

And guess what? The White House might not care much either, so says Tom Barnett:

The long-term slide of the dollar is certainly helping, as is the fact that Asia, Europe, and America all seem to be recovering at roughly the same pace. Ideally, the U.S. will use this ongoing “framework” dynamic to accelerate China’s movement toward de-pegging its currency from the dollar and making it fully convertible, thus accelerating the dollar’s own decline as the global reserve currency. Over the long term, a dollar that can be balanced by a combination of the Euro and Chinese yuan (or some “Asia” basket that combines the value of the yuan, Korea’s won, India’s rupee, and Japan’s yen) is a dollar that cannot get too out of whack from its true value — as in, too fiscally undisciplined back home.

Obama’s framework proposal does truly represent a tipping point in global affairs: a financially humbled America committing itself to abide by IMF counseling in order to keep the trade peace among the world’s biggest economies. His critics will undoubtedly cast this as a humiliating capitulation to “foreign interests,” and these politically potent charges will force the president into all manner of showy protectionist displays. But the larger point is this: By submitting to the collective judgment of globalization’s “board of directors,” America finally admits that its self-styled international liberal trade order has blossomed beyond our control.

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