May 16, 2006	Tuesday	Rabi-us-Sani 17, 1427

LONDON, May 15: The dollar’s fall against major currencies chimes with its long-term trend and helps readjust global imbalances, but it also presents risks for the United States and its trade partners, analysts say. A weak dollar makes it more expensive for consumers in the United States — the world’s biggest economy — to buy foreign imports from China and elsewhere — while making US-produced goods more affordable.

But analysts contend that could have an adverse effect on countries that trade with the US and, in turn, slow down their economic growth.

A weaker US currency has nonetheless eased the need for greater flexibility of the Chinese yuan, cited by Washington as necessary to remove imbalances between Chinese imports and US exports.

In April, finance chiefs from the Group of Seven (G7) industrialised nations called for exchange rates to reflect economic fundamentals, meaning they wanted currencies of emerging economies to appreciate against the dollar.

In particular, they urged a more flexible yuan, the value of which has been maintained within a narrow range against the dollar by Chinese authorities.

The United States, which chalked up a $202 billion trade deficit with China last year, has said that the yuan is undervalued by up to 40 per cent.

Some economists argue however that a weaker dollar, in the short run, does not help the US trade position, which would only improve in the longer term.

“If anything in the short run it could make things worse,” said Julian Jessop at Capital Economics.

“When your currency falls the initial impact is to worsen your trade position because the cost of imports will go up, before the volumes are adjusted. The import bill rises and makes your position worse.”

“We’re probably talking a year or so before it has any clear positive effects.”

According to Audrey Childe-Freeman, an economist at Canadian bank CIBC, further downward dollar movement may also present additional risks for the US economy.

“At a time of renewed concerns about the inflation outlook, a depreciating dollar may exacerbate inflation fears, leading to higher long-term and short-term money rates and eventually, possibly to higher Fed Funds rates,” she said.

“In turn, this would weigh on the stock market and it would also elevate recession risks.”—AFP