The dollar continued to fall this month, reaching its lowest level since 1997 against a basket of foreign currencies. In response, many private economists, along with the administration’s Federal Reserve Chairman Alan Greenspan, expressed concern over the record U.S. trade and budget deficits, which may deter foreign lenders from holding dollar-denominated investments. A major unloading of foreign-held U.S. stocks and bonds could precipitate a further decline in the dollar and cause interest rates to soar in the United States. At home and abroad, people are wondering if the administration will act to prevent a further weakening in the dollar by reining in the trade and budget deficits. Here is a sampling of what America is saying about the declining dollar.
Los Angeles, CA – The LA Times
November 15, 2004 – Editorial
“�????In what amounts to a vote of no confidence in the U.S. economy, the dollar has faded against the euro and the yen on fears that a second Bush administration will continue to do to the nation what the first did — hobble it with a lot more debt.
“�????Foreign investors also worry that the president and Congress will bend in the face of growing protectionist pressure from apparel companies, furniture makers and other industries being pummeled by cheaper foreign goods. Anything that hurts confidence in this country’s economy would be bad news, because the United States is increasingly dependent on foreign investment�????
”The world’s central banks clearly are feeling political pressure to intervene on the increasingly touchy subject of whether exchange rates reflect economic realities. Regardless of that debate, the dollar will remain hamstrung by the administration’s refusal to raise taxes or cut spending. The danger is that in order to continue attracting foreigners’ money, the day will come when the Fed will have to respond to a weak dollar and widening federal and trade deficits by raising interest rates more abruptly than otherwise prudent.”
New York, NY – The New York Times
November 13, 2004 – Editorial
“For all its professed desire for a strong dollar, the Bush administration has apparently decided that letting the dollar slide is a good way to shrink America’s trade deficit. This is dubious economic policy. It provides a modicum of relief to American exporters, but it increases the nation’s vulnerability to higher prices and higher interest rates, while ignoring fiscal measures that would more assuredly anchor the United States in the global economy�????
”The underlying problem is that deficits in America’s global transactions are at record levels, putting Americans at risk of either a slow deterioration in living standards or abrupt spikes in inflation and interest rates�????
”The only lasting remedy is to reduce the federal budget deficit. That, in turn, calls for specific policies, like — we may have mentioned this before — rolling back the Bush tax cuts. Letting the dollar weaken is a far less responsible approach, an unwieldy and risky attempt to reduce the trade imbalance without the political pain of deficit reduction.
Fort Collins, CO – The Fort Collins Coloradoan
November 12, 2004 – Letter to the Editor
“�????The dollar plummeted to an all time low across the globe amid the prospect of four more years despite the unexpected good job numbers and a drop in oil prices.
“A sign that foreign financial institutions don’t share the victory fewer and perceive a higher risk associated with the dollar. A sign that demand for US Treasury Bonds is declining and they are being sold off to hedge the risk in light of rumors that China will sell at least some of their holdings. Currently, China holds 40 percent of US Treasury Bonds.
”Who is going to finance the U.S. deficit, the war in Iraq, the war on terrorism etc=?”
Boston, MA – Christian Science Monitor
November 22, 2004 – Editorial
“When Alan Greenspan, the oracle of the Federal Reserve, wrinkles his brow in disapproval at a financial trend, it sends ripples into world markets.
”Recently, markets have wondered what Mr. Greenspan thought about pressures on the US dollar exchange rate as a result of Americans importing more than they export and Washington spending more money than it collects in taxes. These two deficits are financed to a large degree by foreigners who buy dollars, and who could just as easily sell them, sending the US economy into a tumble.
”On Friday, the central bank chief warned that this dollar buying ‘cannot continue to increase forever.’�????
“Greenspan predicted "a diminished appetite" for foreigners buying the greenback. His warning seemed to come with a certain faith in world markets adjusting to the dollar decline. Congress, however, needs to follow his advice to rein in the government deficit by returning to the budget discipline of the past decade.”
Baltimore, MD – The Baltimore Sun
November 8, 2004 – Editorial
“Last week, as President Bush, flush with electoral victory, confidently outlined his agenda for his second term, support for the dollar sank�????
” And by week’s end – despite good news in the latest U.S. jobs report Friday – the dollar hit a record low against the euro�????
”Said one London currency trader quoted by Bloomberg News after the favorable jobs report failed to spark a dollar rally: ‘There is something seriously wrong with the dollar. If you can’t smell the coffee on this, I don’t know what’s wrong with you.’�????
“In his first term, Mr. Bush appeared blind to mounting deficits. At the start of his second term, his concern does not appear appreciably heightened. Instead, Mr. Bush is offering a radically large ambition – simultaneously overhauling the tax code and Social Security. The nation must respond cautiously, lest he break its bank.”
New York, NY – The New York Sun
November 17, 2004 – Editorial
“President Bush hasn’t much discussed what could be his biggest economic problem. It’s not budget deficits or jobs. It’s the possible crash of the dollar on foreign exchange markets�????
“The dollar lubricates the world economy; it’s used for much trade and cross-border investment. In some form, a "dollar problem" has long existed. After World War II, there was a "dollar gap": Europe and Japan didn’t have enough dollars to import the food and machinery needed for recovery. America filled the gap with foreign aid and policies encouraging multinational American firms to invest abroad. These policies provided dollars, although America still ran big trade surpluses.
”The problem now is similar and different. Like the 1950s, today’s outflow of dollars stimulates the global economy. Unlike the 1950s, it involves huge American trade and current-account deficits. (The "current account" includes trade plus other "current" overseas payments, such as travel, freight costs, and dividend payments.) In 1990, the American current account deficit was $79 billion, or 1.4% of gross domestic product. In 2004, it’s expected to hit about $665 billion, or 5.6% of GDP�????”