U.S. dollar slump to continue
Kevin Carmichael
From Friday's Globe and Mail Published on Friday, Jan. 29, 2010 12:00AM ESTLast updated on Wednesday, Feb. 03, 2010 1:52PM EST
With a few words in his State of the Union speech, President Barack Obama crushed the hopes of anyone waiting for a stronger dollar. "Tonight, we set a new goal: We will double our exports over the next five years, an increase that will support two million jobs in America," he said to applause. [1]
There are two ways to interpret that pledge. [2]
On one hand, the commitment is unambiguously positive, especially for the small businesses and farmers that Mr. Obama said would be the main beneficiaries of his export-boosting efforts. If the President is successful, the world can only benefit from stronger growth in its biggest economy. [3]
There's also the currency trader's interpretation. If a big part of Mr. Obama's economic policy is doubling U.S. exports, there is no incentive to do much to reverse the 25-per-cent decline in the dollar since 2002. [4]
Meeting an export target contradicts the administration's "strong dollar" policy, suggesting companies seeking sales in the United States will have to do so without an exchange-rate advantage. [5]
"When a president talks about increasing exports, there really are only two ways to do it," said Sophia Drossos, a currency strategist at Morgan Stanley in New York and a former economist at the Federal Reserve. "You can improve the efficiency of companies, but that takes time. The second thing is a relative price adjustment of the currency." [6]
The dollar's slump is helping the United States escape its toughest recession since the 1930s. Exports surged 17.8 per cent in the third quarter, compared with a 4.1-per-cent decline in the previous three months, helping gross domestic product expand for the first time in a year. [7]
That hasn't prevented Treasury Secretary Timothy Geithner from adopting a mantra that has been uttered by all his predecessors dating back to Robert Rubin in Bill Clinton's administration. Like them, he has said repeatedly that the United States is better off with a strong dollar. [8]
The greenback's decline last year roiled foreign-exchange markets as international investors sought short-term profits in faster growing or more stable economies than the United States. Some countries, such as Brazil and Taiwan, have sought to slow their currencies' ascent by taxing or restricting international capital. The Bank of Canada says the Canadian dollar’s rise, which is in large part a reaction to the US dollar's fall, is one of the biggest threats to the country's rebound. [9]
The greenback was too strong in the years before the crisis, pushed higher by international investors lured by what turned out to be debt-fuelled consumption, and by countries such as China that purchased U.S. assets to keep their own currencies relatively weak, said Fred Bergsten, director of the Washington-based Peterson Institute for International Economics. [10]
"This is part of a broader strategy," said Mr. Bergsten, adding that research by the Peterson Institute suggests the greenback is now trading at a fair value against peers such as the Canadian dollar and the euro. "The President has stated several times that the U.S. doesn't intend to go back to being the consumer of last resort." [11]
US dollar slump to continueName:
- Read the article overleaf and answer the questions with follow.
- Define the following terms in bold in the article:
- Exports(2)
- Recession(2)
- With the aid of a diagram, explain why the US dollar was likely too strong in the years leading up to the financial crisis. (paragraph 10) (4)
- With the aid of a diagram, explain how President Obama’s commitment to an increase in exports will influence currency traders and likely lead to a continued decline in the value of the dollar. (paragraphs 4 and 9) (4)
- Using information from the article and your knowledge of economics, evaluate Obama’s policy of encouraging continued dollar weakness in at least the near term. (8)