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Mon, Nov 29, 2004 - Page 12 News List

Weaker dollar better for the US

WORLDWIDE IMPACT Former US treasury secretary John Connolly's maxim -- `The dollar is our currency, but your problem' is as true today as it was three decades ago


The dollar's fall is shaking up the global economic and political balance, but most of the pain is being borne by countries other than the US. The dollar's decline has accelerated in recent days as it slumped to new lows against the euro and a five-year nadir against the yen.

Economists are agreed that the world must get used to living with a weaker dollar and that the well- known maxime of John Connolly, US treasury secretary under president Richard Nixon, -- "The dollar is our currency, but your problem" -- still applies.

The dollar's current weakness stems from the US' "twin deficits" due to overspending by the federal government and overspending by consumers on foreign goods, especially from China.

The overspending, which has until now been largely financed directly or indirectly by Asian central banks, has stimulated US economic growth. However, many economists consider such a policy to be ultimately untenable.

As a result, the US has an interest in letting the dollar swoon despite the well-worn, official "strong dollar" policy, to which the currency markets now pay little heed. A weaker dollar makes US exports more attractive abroad and imports less attractive in the US, which at the macroeconomic level helps reduce the US current account deficit with the rest the world.

The Bush administration has preferred the option of letting the dollar fall, a policy which analysts have dubbed "benign neglect," rather than trade protectionism or forcing the economy to slow, said HSBC-CCF strategist Paul Douaihy.

But the dollar is so dominant in global trade and financial transactions that this policy has immediate consequences elsewhere.

BNP Parisbas chief economist Philippe d'Arvisenet said that until now the dollar's decline has mainly concerned the eurozone because many Asian countries have arrangements to limit the impact on their currencies.

China, for example, has had the yuan pegged to the dollar since 1994 while other countries such as Japan have a policy of intervening in the currency markets by buying dollars in order to halt the appreciation of their currencies.

The so-called "dollar zone" of economies whose currencies are tied to the dollar, which includes the US, China, and most emerging market Asian and Latin American countries, are benefitting from the dollar's weakness, or at least have escaped its inconveniences. How-ever, that increases the impact of the weak dollar on the eurozone.

"In the near term I do not see anything that can stop the euro appreciation, and there is no doubt that Europe will suffer from that", said Bank of America economist Lorenzo Codongo from London.

Douaihy said there was no domestic stimulus to compensate for the impact of the dollar's weakness and the rise of the euro would increasingly sap eurozone growth, and therefore, employment. As for Japan, it is already teetering on recession, he said.

US Secretary of the Treasury John Snow lectured Europeans during a tour of the continent earlier this month to adopt growth-stimulating reforms rather than complain about the weakness of the dollar.

But Codongo said there was little appetite for probably painful reforms right now in Europe.

"Most countries have elections next year looming so I don't think there is a significant chance for structural reforms," he said.

However, in the medium term relief could be on the way with most analysts expecting Asian countries to allow their currencies to gain in value against the dollar.

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