How much further will the US dollar fall? Or has it already fallen so far that it will now start to move back to a higher level?
For travelers to the US from Europe or Asia, US prices are dramatically lower than at home. A hotel room or dinner in New York seems a bargain when compared to prices in London, Paris or Tokyo. And shoppers from abroad are loading up on a wide range of products before heading home.
But, despite this very tangible evidence, it would be wrong to conclude that US goods are now so cheap at the existing exchange rate that the dollar must rise from its current level. Although the goods and services that travelers buy may cost less in the US than abroad, the overall price of US products is still too high to erase the enormous trade imbalance between the US and the rest of the world.
To be sure, the falling dollar over the past few years has made US products more competitive and has caused the real value of US exports to rise sharply — by more than 25 percent over the past three years. But the trade deficit last year nevertheless remained at more than US$700 billion or 5 percent of GDP.
The large trade deficit and equally large current account deficit (which includes net investment income) implies that foreign investors must add US$700 billion of US securities to their portfolios. It is their unwillingness to do so at the existing exchange rate that causes the dollar to fall relative to other currencies. In falling, the dollar lowers the value of the dollar securities in foreign portfolios when valued in euros or other home currencies, shrinking the share of dollars in investors’ portfolios. The weaker dollar also reduces the risk of future dollar decline, because it means that the dollar has to fall less in the future to shift the trade balance to a sustainable level.
But what is that sustainable level of the trade balance and of the dollar? While experts try to work this out in terms of portfolio balances, a more fundamental starting point is the fact that a US trade deficit means that Americans receive more goods and services from the rest of the world than they send back —US$700 billion more last year. The difference was financed by transferring stocks and bonds worth US$700 billion. The interest and dividends on those securities will be paid by sending more “pieces of paper.” And when those securities mature, they will be refinanced with new stocks and bonds.
It is unthinkable that the global economic system will continue indefinitely to allow the US to import more goods and services than it exports. At some point, the US will need to start repaying the enormous amount that it has received from the rest of the world. To do so, the US will need a trade surplus.
So the key determinant of the dollar’s long-term value is that it must decline enough to shift the US trade balance from today’s deficit to a surplus. That won’t happen anytime soon, but it is the direction in which the trade balance must continue to move. And that means further depreciation of the dollar.
An important factor in this process will be the future price of oil and the extent of US dependence on oil imports. In each of the past four years, the US imported 3.6 billion barrels of oil. At the current price of more than US$140 a barrel, that implies an import cost of more than US$500 billion. The higher the cost of oil, the lower the dollar has to be to achieve any given reduction in the size of the trade deficit. So a rising oil price as measured in euros or yen implies a greater dollar fall, and therefore an even higher oil price when stated in dollars.
There is one further important consideration in thinking about the future value of the dollar: relative inflation rates in the US and abroad. The US trade deficit depends on the real value of the dollar — that is, the value of the dollar adjusted for differences in price levels in the US and abroad. If the US experiences higher inflation than our trading partners, the dollar’s nominal value must fall even further just to maintain the same real value.
The inflation differential between the dollar and the euro is now relatively small — only about 1 percentage point a year — but is greater relative to the yen and lower relative to the yuan and other high-inflation currencies. Over the longer run, however, inflation differentials could be a more significant force in determining the dollar’s path.
Martin Feldstein, a professor of economics at Harvard, was the chairman of former president Ronald Reagan’s Council of Economic Advisers and president of the National Bureau for Economic Research.
Copyright: Project Syndicate
Two sets of economic data released last week by the Directorate-General of Budget, Accounting and Statistics (DGBAS) have drawn mixed reactions from the public: One on the nation’s economic performance in the first quarter of the year and the other on Taiwan’s household wealth distribution in 2021. GDP growth for the first quarter was faster than expected, at 6.51 percent year-on-year, an acceleration from the previous quarter’s 4.93 percent and higher than the agency’s February estimate of 5.92 percent. It was also the highest growth since the second quarter of 2021, when the economy expanded 8.07 percent, DGBAS data showed. The growth
In the intricate ballet of geopolitics, names signify more than mere identification: They embody history, culture and sovereignty. The recent decision by China to refer to Arunachal Pradesh as “Tsang Nan” or South Tibet, and to rename Tibet as “Xizang,” is a strategic move that extends beyond cartography into the realm of diplomatic signaling. This op-ed explores the implications of these actions and India’s potential response. Names are potent symbols in international relations, encapsulating the essence of a nation’s stance on territorial disputes. China’s choice to rename regions within Indian territory is not merely a linguistic exercise, but a symbolic assertion
More than seven months into the armed conflict in Gaza, the International Court of Justice ordered Israel to take “immediate and effective measures” to protect Palestinians in Gaza from the risk of genocide following a case brought by South Africa regarding Israel’s breaches of the 1948 Genocide Convention. The international community, including Amnesty International, called for an immediate ceasefire by all parties to prevent further loss of civilian lives and to ensure access to life-saving aid. Several protests have been organized around the world, including at the University of California Los Angeles (UCLA) and many other universities in the US.
Every day since Oct. 7 last year, the world has watched an unprecedented wave of violence rain down on Israel and the occupied Palestinian Territories — more than 200 days of constant suffering and death in Gaza with just a seven-day pause. Many of us in the American expatriate community in Taiwan have been watching this tragedy unfold in horror. We know we are implicated with every US-made “dumb” bomb dropped on a civilian target and by the diplomatic cover our government gives to the Israeli government, which has only gotten more extreme with such impunity. Meantime, multicultural coalitions of US