Politics may slow greenback’s decline

Politics may slow greenback’s decline
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First Published: Mon, Apr 30 2007. 11 57 PM IST
Updated: Mon, Apr 30 2007. 11 57 PM IST
The US has passed another milestone in its long march of relative decline in the global economy. On Friday, 27 April, the dollar fell to an all-time low of $1.37 against the euro. Although the greenback recovered slightly on 30 April morning, the currency’s weakness is clear and broad. On the US Federal Reserve Board’s broad trade-weighted index, the greenback has fallen 4% in the last year and 18% over the last five years. On the narrow index, which excludes countries that control exchange rates, the five-year decline has been 27%.
There are several theories about what move currencies. All of them are pointing to a lower dollar. US growth is disappointing, at a 1.3% annual rate in the first quarter, according to the first estimate. That increases the chance of interest rate cuts, which makes the dollar less attractive. Conversely, US inflation is still too high, at 2.2% on the conservative measure of core personal expenditures. That makes the dollar a less sure store of value. Then there is the trade deficit, which seems to have stabilized, but at a scary level of 6% of GDP. Finally, the intangible quality of respect for the US in the world is in bad shape. It will be hard to reverse many of these trends. To get interest rates up, US economic growth prospects have to pick up. But faster growth is likely to bring on inflationary pressure. As long as most non-US economies stay strong, the dollar is likely to stay weak.
But weakness does not necessarily entail collapse. The most important support of the dollar is not interest rates, growth or even American prestige. It is the willingness of the governments of big US trading partners in Asia and the oil-producing regions to buy US securities. Those investments don’t make great financial sense, but they seem to serve domestic political goals. As long as that stays true, the pace of the dollar’s decline is likely to remain stately.
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First Published: Mon, Apr 30 2007. 11 57 PM IST
More Topics: Money Matters | Currency |