- The Washington Times - Tuesday, May 27, 2003

The dollar fell to a record low against the euro yesterday, extending a rapid descent this year that makes cars and wines from Europe and vacations to the continent more expensive for Americans.

The dollar’s fall to $1.19 in European trading yesterday, while a bane for U.S. consumers, essentially retraced the precipitous decline of the euro after its introduction in January 1999. The greenback bounced back a bit to $1.18 in New York trading, as investors focused on a rash of reports showing stronger domestic consumer confidence and home sales.

For Europeans, the reascendancy of the euro represents a comeuppance for heavy-handed Americans, while for the latter, it offers an opportunity to revive an ailing economy and manufacturing sector crippled in past years by an ever-strengthening dollar that made U.S. exports increasingly uncompetitive.

The dollar’s drop accelerated during the weekend when European leaders signaled willingness to accept a stronger currency, despite the pain it is causing exporters in Germany, France, and other countries in the continent that depend on U.S. sales for growth.

Lucas Papademos, vice president of the European Central Bank, said the euro’s elevated value is “consistent with historical averages over the past 15 years” in the values of the European currencies that the euro replaced.

Ernst Welteke, president of Germany’s central bank, called an exchange rate of $1.18 per euro “competitively neutral” for exports.

U.S. leaders also have signaled this month that they are comfortable with a softer dollar that helps promote American exports and growth, although the White House insists it has not changed the administration’s “strong dollar” policies.

Economists say the weakening dollar, a natural outgrowth of the extraordinarily low interest rates engineered by the Federal Reserve, may be the most powerful weapon U.S. leaders have to force an improvement in the economy here as well as abroad.

“A weaker dollar could accomplish more to rekindle the economy than the tax cuts President Bush proposed,” said Peter Morici, business professor at the University of Maryland. He said the administration should drop its “ambivalence” toward the softer dollar and push it lower against all world currencies.

While the dollar has dropped 25 percent against the euro since peaking in world currency markets in February last year, it has declined 10 percent against the Japanese yen and has not fallen against the Chinese yuan, Mr. Morici noted, despite the massive trade deficits the United States has with both nations.

The Bank of Japan and other Asian central banks recycle the dollars Americans use to pay for imports of Asian cars, electronics and other products by purchasing U.S. bonds. That cushions the fall of the U.S. currency while maintaining the competitive edge Asian exporters enjoy from having weaker currencies.

This manipulation of exchange rates by the Asian central banks “reduces the prospects for a robust economic expansion” not only in the United States through a revival of exports, Mr. Morici said, but also in Japan, where the government has relied for too long on exports to prop up its ailing economy.

A sharper drop in the dollar from the 117 yen today to about 100 yen would force the Japanese government to spur growth through long-delayed structural reforms of its economy and its banking system, he said.

China, meanwhile, has resisted steadfastly the rise in its exchange rate that would result naturally from its robust economic growth, he said, while its undervalued currency encourages U.S. businesses to relocate their manufacturing facilities and jobs to China.

That has contributed to the loss of more than 2 million manufacturing jobs in the United States in the past two years and has created a burgeoning U.S. trade deficit of more than $400 billion. Mr. Morici estimates that every $100 billion increase in the trade deficit is like a $100 billion tax increase on the economy.

“Pressing for a weaker dollar, especially against the yen and yuan, could easily reduce the current deficit by one quarter,” he said, and have “twice the stimulative effect” of Mr. Bush’s original $750 billion tax-cut plan.

Other analysts warn, however, that the economic benefits from a lower dollar could unravel quickly if the dollar’s fall triggers a sell-off by foreign investors who dump U.S. stocks and bonds out of worry that their investments will lose value rapidly.

“The administration is walking a very fine line” because it needs to prevent a massive sell-off that raises the risk of a financial crisis at the same time that it encourages a revaluation of the U.S. currency, said Jay Bryson, global economist at Wachovia Securities.

While “a dollar free-fall seems rather remote,” he said, a mass exodus by foreign investors has the potential to cause a drop in stock prices and rise in interest rates that cuts short the modest U.S. economic recovery. “The administration does not want to go there,” he said.

Fears of a sell-off by foreign investors set off alarm in the U.S. stock market last week, but seemed far from view yesterday. The upbeat news on consumer confidence and home sales sent the Dow Jones Industrial Average up 180 points to 8,781.

William E. Lauer Jr., chief investment officer for Chevy Chase Trust, said the stock market is focusing on the improved European earnings and sales that U.S. corporations are reporting as a result of the falling dollar.

But the weakening dollar still looms as a threat to the stock market because the United States needs $1.5 billion a day in new foreign investments to finance its massive trade and budget deficits, he said. “That surely won’t encourage the inflow of foreign capital that is so vital.”

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