WASHINGTON: The US administration appears unfazed as the dollar plummets on currency markets, giving a helpful trade boost during an economic slowdown, analysts believe.
But a danger lies in the dollar falling so far that it unleashes inflation, sparking retaliation by the Federal Reserve.
The Treasury has expressed no concern as the euro has hit 20-month highs above 1.33 dollars. The greenback is at 14-year lows against the British pound, although the US unit has held its own to the Japanese yen.
Treasury Secretary Henry Paulson's mantra is that “a strong dollar is clearly in the nation's interest”, and that its value must be set on open markets. That public stand will not change, pundits say.
“If the dollar's decline becomes disorderly, if it was flying out of the window, the administration would get very concerned,” said Wachovia global economist Jay Bryson.
“Not only the dollar would be going down, long-term interest rates would be spiking up and that would trigger a recession here. But as long as it remains orderly, the administration will take a position of benign neglect,” he said. University of Maryland Business Professor Peter Morici said: “The administration would like a weaker dollar against the (Chinese) yuan, and that would likely pull it down against other Asian currencies too.”
Morici, a trenchant critic of Chinese trade policies, said a more realistic dollar-yuan rate would redress some of the greenback's decline to the euro.
But he added: “The administration is speaking out of two sides of its mouth.
“It can't have a devaluation against the yuan, (South Korean) won, yen and other Asian currencies and a strong dollar. It can't have its cake and eat it too.”A dollar decline has been long anticipated, given the parlous state of the US current account. Now, a slowing economy and a suspension of Fed rate hikes seem to have brought the dollar bears truly out to play. A weaker dollar will make US exports cheaper on foreign markets, and so will encourage the global economic rebalancing long sought by the US government to redress the record trade deficit.—AFP
