Dollar’s fall takes toll

The following editorial appeared in the Chicago Tribune on Friday.

American consumers pay little attention to the dollar’s value around the world, until they go to Ireland and come home with shocking stories to tell their friends about the high price of Aran sweaters.

If you’re in business, though, it’s becoming harder to overlook the recent fall of the dollar, which has reached a 20-month low against the euro. It now takes more than $1.32 to buy one euro’s worth of goods. The dollar’s at a 14-year low against the British pound and has lost 7 percent of its value this year against an index of major currencies.

You would think this would prompt cries of alarm from U.S. officials. A falling currency usually signals economic weakness or a loss of confidence. But the fall of the dollar hasn’t caused a lot of breast-beating in Washington.

Treasury Secretary Henry Paulson said what American treasury secretaries are obliged to say, that the U.S. supports a “strong dollar.” He said this as he prepared to leave for China where he will press for a stronger yuan, which would mean a weaker dollar.

In truth, the United States would gladly support a dollar that is not quite as strong as it has been. That makes U.S. manufacturers happy because it makes American exports more competitive. But nobody in an official capacity wants to admit that for fear that it would be viewed as a policy change and could lead to a dollar collapse.

Meanwhile, a slowly depreciating dollar helps correct a world of huge imbalances. The U.S. imports more than it can pay for and big exporting countries (particularly China and Japan) finance much of it by buying up dollars to hold in reserve. Those imbalances are gargantuan. The U.S. trade deficit continues to hit record highs; it should top $800 billion this year. China holds $1 trillion worth of its reserves in dollars and Japan has $900 billion. This correction is long overdue.

After an even worse swoon several years ago, the dollar bounced back strongly, a development that baffled experts. Why? The most prevalent explanation is that the dollar isn’t just another currency among many. It’s the world’s dominant currency. Even in the eurozone, about a third of all exports and 40 percent of imports are still denominated in dollars.

But now the dollar is falling again. Foreign banks may have reached their limit on holding dollars and there are alternatives because other currencies, the euro in particular, have become more competitive. The Federal Reserve Board raised short-term interest rates 17 times over two years, then stopped at 5.25 percent last June. Evidence now is accumulating that U.S. economic growth may be slowing. That has many betting the Fed’s next move will be to cut rates. Meanwhile, the European Central Bank hiked its short-term rate on Thursday to 3.5 percent. That rate stood at just 2 percent a year ago.

The U.S. wants a dollar that floats downward, rather than one that plummets to earth. A plummeting dollar would be disastrous for the U.S. economy and a world that has come to rely on America’s insatiable appetite for spending. A gently downward-floating dollar allows America to curb its appetite and everyone else to develop their own.