- The Washington Times - Thursday, August 16, 2001

The dollar fell dramatically yesterday, driven by doubts about whether the United States can continue to avoid recession and sustain huge trade deficits that require a continuous inflow of money from abroad.
The currency sank to nearly a five-month low of 91.18 cents per euro and a two-month low of 119.46 Japanese yen in New York trading. Only weeks ago, the greenback hit a 15-year high against other world currencies.
Reports showing a fading U.S. economy have prompted a reassessment in recent days in financial markets. For years, the dollar has reflected the United States' economic strength. That strength — which so far has been only slightly impaired — has made overseas travel and goods cheap for American consumers while attracting investment from abroad.
But the dollar's long stint as the world's reigning currency and safe-haven investment appeared to come into question after a Federal Reserve staff report last week depicted a U.S. economy on the brink of recession. The report triggered a minor flight into gold, which is considered a last-ditch safe haven for investors.
Treasury Secretary Paul H. O'Neill appeared to confirm market fears yesterday, saying in a CNBC interview that economic growth in the United States is somewhere between -0.5 percent and 0.5 percent. The negative figure would be a signal of recession.
But Mr. O'Neill was quick to repeat his faith that measures are in place to produce a recovery to healthier growth by the end of the year, including the tax cuts engineered by the Bush administration, which he said were putting the annual equivalent of $200 billion of spending money in consumers' pockets this month.
"Even in a $10 trillion economy, it is a significant jolt," he said. "I think we are now on the threshold of improvement."
Also yesterday, the Fed reported that industrial production fell 0.1 percent in July, the 10th consecutive drop.
But the Fed's regional report and one this week from the International Monetary Fund cast doubt on the economy's ability to withstand strong downward pressures from worldwide recessions in manufacturing, technology and business investment spending.
The Fed report triggered a sell-off of stocks as well as the dollar by noting that the U.S. recession in manufacturing spread to other sectors in June and July.
The dollar dropped further when the IMF said a voracious appetite for imports in the United States has driven the current account deficit to an unprecedented 4.5 percent of gross domestic product — an "unsustainable" level that would have engulfed any other country in financial crisis.
The United States must borrow hundreds of billions of dollars each year from abroad to sustain its trade deficits, which are running at more than $400 billion a year. That task is made easier by the dollar's pre-eminence as the world's currency of choice.
But the constant need for huge injections of money into a weakening economy "raises concerns that the dollar might be at risk for a sharp depreciation," the IMF said, particularly if a long period of sluggishness pulls down the strong productivity growth that has attracted investment into the United States.
Any "sudden" adjustment of the dollar and the deficit, the IMF added, could "have adverse effects on the United States and the rest of the world economy."
Clyde Prestowitz, president of the Economic Strategy Institute, said the IMF's turnabout this year after years of downplaying the threat from ever-higher U.S. trade deficits shows how serious the problem has become.
"The dollar has been overvalued for some time," particularly against the euro, given the bloated deficits, he said. But any major devaluation would pose a threat to the stability of the U.S. economy and financial markets.
The best hope for the United States is that a gradual weakening of the dollar will help to curb the trade deficit by making imports more expensive and enabling American manufacturers to sell more of their goods abroad, he said. That also would help to lift growth in the United States.
"But it's not to hard to conjure a perfect storm scenario," Mr. Prestowitz said, with a plunging dollar triggering a broad financial crisis.
"The situation is very fragile," he said. "We're slowing down."

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