Kurt Brouwer October 10th, 2007
As we wrote in How Far Has the Dollar Fallen? And Why?, the dollar declines when U.S. interest rates decline. And, so far, the U.S. Treasury is perfectly happy with the results. Exports are up and the trade deficit is benefiting as shown in this article by Edmund L. Andrews from the International Herad Tribune [emphasis added]:
‘The dollar is near record lows against the euro and has weakened considerably against several other major currencies, but officials in Washington are reacting with almost contented silence.
Less than two weeks before finance ministers from the Group of 7 leading industrial nations are to meet to discuss economic policy, European officials are grumbling about the weakened dollar because it makes American exports cheaper in world markets…’
The Europeans can grumble all they want, but they know exactly what they need to do in order to reduce the upward trajectory of the Euro versus the dollar. As we wrote in Asia Adjusts, But Europe Just Complains, there are simple steps the European Central Bank could take if it wanted to do anything. The IHT article continues:
‘…Analysts see little mystery in the American position: at the moment, a weaker dollar offers more benefits than a stronger one. The cheaper dollar offers a lift to American exporters by making their products competitive in many parts of the world. And while a weak dollar usually makes imports expensive, import prices have so far climbed less than other currencies’ values because foreign producers have kept prices low to preserve market share in the United States.
“Implicitly, Paulson and the Federal Reserve are happy with a gradual fall in the value of the dollar,” said Nouriel Roubini, an economist at New York University. “They’ll never say they favor a weak dollar, but the benefits to the U.S. in terms of competitiveness are significant.”
Though Paulson has primary responsibility for American exchange rate policy, Federal Reserve officials have also made it clear that they are not worried about imminent inflationary dangers from a weaker dollar.
The Fed chairman, Ben Bernanke, recently told a congressional hearing that the dollar’s value remains strong in other ways. “The value of the currency can also be expressed in terms of what it can buy in domestic goods — the domestic inflation rate,” Bernanke said in response to questions about the dollar from Representative Ron Paul, Republican of Texas and a long-shot candidate for the Republican presidential nomination. Noting that inflation remains low, Bernanke suggested that the dollar’s weakness was not a source of concern to the Fed.
Democratic lawmakers, who have been quick to attack the Bush administration about most other economic policies, have said almost nothing about the currency’s decline.
To at least some European officials, worried that the soaring value of the euro will hurt European exports, the American silence has been thunderous…’
Silence is golden in this case. The Fed and the U.S. Treasury are working together to manage the economy and keep economic growth on track. They are also doing their best to deal with long-term problems such as the trade deficit. In my opinion, we are lucky to have such solid economic leadership.
Hat tip: BrothersJuddBlog
Tags: Business, decline, dollar. Euro, trade deficit