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Re: Thursday, May 3, 2007
Hey All, It's simpler than all that, and less ominous to boot. Our country has had a "weak dollar" policy for some time now, for a couple of intentional reasons: 1) We want to encourage more U.S. exports by making them cheaper to overseas buyers, which will (hopefully) reduce the growth in our trade deficit. When the dollar becomes cheap to foreigners, they are more likely to visit us and leave their Euros in our hotels and restaurants, and perhaps they'll start importing more of our goods as well. Remember, it doesn't do the American economy any good for Americans to spend all their money in Europe, we want the Europeans to spend all of their money over here. The government is not at all unhappy with the weak dollar. 2) We are keeping our interest rates low because we are trying to steer away from the risk of falling into recession (a risk which is heightened by rising oil prices), but the result of this is that international investors would rather hold Sterling which will give them a higher return. When investors sell dollars in order to buy Sterling, the cost of dollars goes down and the cost of the Sterling goes up. UK interest rates are substantially higher than ours right now, causing the Pound exchange rate to be particularly painful. Finally, the interesting problem with #1 above is that the most important currency to our trade deficit, the Chinese renmimbi, is artificially pegged to the dollar rather than allowed to reflect its real value, which should be much higher. As a result, Chinese goods are still artificially cheap to us so we keep on buying them, aggravating the trade deficit. I'm no fan of this administration, but they have been doing the right thing by pressuring China to let their currency float (which of course they have no intention of doing). Steve
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