Post-election dollar risk may hurt Europe

MIKE DOLAN WASHINGTON – The United States’ dependence on foreign money to balance its books is set to increase during US President George W Bush’s second term and experts warn of trans-Atlantic friction over the risks this poses the dollar.

The record US current account deficit, estimated at over five per cent of national income, is building pressure for a weaker dollar and many feel a newly-elected Bush team may be happy to let the currency fall, as it was early in its first term. “The US current account deficit just keeps getting bigger and will continue to do so,” said Larry Kantor, head of global economics at Barclays Capital, adding:”With official concern about inflation low and the effect of interest rate and tax cuts fading, a weaker dollar may be an appealing policy tool.”There is a growing acceptance in many official and private circles that a weaker dollar is needed to help ease the huge US trade and budget deficits, economists said.But the international process remains complicated.If, as expected, Asian economies like Japan and China continue to resist a weaker dollar by buying greenbacks to keep their currencies low and protect their exporters, then export-dependent European nations could bear the brunt of a weakening dollar if the euro strengthens as a result.This is worrying for the euro zone as it is the world’s second-largest economic area and the slowest-growing one, and much of its modest recovery in the past year is export-driven.FRAUGHT G7 Economists said the Group of Seven top economic powers, or an expanded grouping including China and other emerging economic giants, needs to monitor this over the next six months and so their meetings may be increasingly fraught.Finance chiefs from the G20 — the G7 plus the major developing nations — next meet in Berlin on November 20 and 21.Many economists consider Bush’s plan to halve the budget deficit in five years unrealistic and see no hard measures to boost paltry private savings.Unless there is a major change to that, the current account gap will widen further, they say.”I can’t see any substantial change in their view of the global macro situation,” said Peter Kenen, Professor of Economics and International Finance at Princeton University.”They have made their point clear on the adjustment path for the world economy,” he said.”They see this as a matter of the rest of the world growing faster to buy US imports and currency flexibility being up to the others, notably Asia.”A widening deficit means that either foreign investors and governments bridge the gap by buying ever more US bonds, stocks and other assets, or the dollar falls until they do.Asian governments, who buy US assets to smooth their currency management and export competitiveness, may well continue to buy.But private investors may get more anxious about concentrating more and more of their money in dollars.This could push the dollar into a downward spiral if investors defer purchases of US assets in anticipation of a weaker dollar, which in turn accelerates dollar weakness.The dollar has fallen more than 4 per cent against a basket of world currencies in the past month, and financial markets sense that a lower dollar may be the only route to keep attracting foreign money and lifting US exports.Even some Federal Reserve officials, who normally shun comment on exchange rates, have indicated a lower dollar is likely, if not inevitable.If this downtrend continues and Asia resists, then the risk for Europe of a US policy of “benign neglect” is high.”I don’t see a nice way out of all this,” said Kenen.”I can see a collaborative way out but that is not the way this administration operates.”RISK OF GOING IT ALONE Statements this year by the G7 powers — the United States, Japan, Germany, France, Britain, Italy and Canada — agreed that disorderly exchange rate movements were not desirable and that Asia should pursue greater currency flexibility.The first part was prompted by a European desire that the euro not rise unduly due to needed dollar depreciation against Asian currencies.The US has its biggest deficits with Asia.European Central Bank chief Jean Claude Trichet repeated this on Thursday and said the US had a strong dollar policy.But if Asia doesn’t budge and the US distances itself from the whole issue, Europe could suffer.Peter Morici, business professor at Maryland University, said he believes the Asia exchange rate conundrum will not be a priority for a new Bush government.- Nampa-Reuters”The US current account deficit just keeps getting bigger and will continue to do so,” said Larry Kantor, head of global economics at Barclays Capital, adding:”With official concern about inflation low and the effect of interest rate and tax cuts fading, a weaker dollar may be an appealing policy tool.”There is a growing acceptance in many official and private circles that a weaker dollar is needed to help ease the huge US trade and budget deficits, economists said.But the international process remains complicated.If, as expected, Asian economies like Japan and China continue to resist a weaker dollar by buying greenbacks to keep their currencies low and protect their exporters, then export-dependent European nations could bear the brunt of a weakening dollar if the euro strengthens as a result.This is worrying for the euro zone as it is the world’s second-largest economic area and the slowest-growing one, and much of its modest recovery in the past year is export-driven.FRAUGHT G7 Economists said the Group of Seven top economic powers, or an expanded grouping including China and other emerging economic giants, needs to monitor this over the next six months and so their meetings may be increasingly fraught.Finance chiefs from the G20 — the G7 plus the major developing nations — next meet in Berlin on November 20 and 21.Many economists consider Bush’s plan to halve the budget deficit in five years unrealistic and see no hard measures to boost paltry private savings.Unless there is a major change to that, the current account gap will widen further, they say.”I can’t see any substantial change in their view of the global macro situation,” said Peter Kenen, Professor of Economics and International Finance at Princeton University.”They have made their point clear on the adjustment path for the world economy,” he said.”They see this as a matter of the rest of the world growing faster to buy US imports and currency flexibility being up to the others, notably Asia.”A widening deficit means that either foreign investors and governments bridge the gap by buying ever more US bonds, stocks and other assets, or the dollar falls until they do.Asian governments, who buy US assets to smooth their currency management and export competitiveness, may well continue to buy.But private investors may get more anxious about concentrating more and more of their money in dollars.This could push the dollar into a downward spiral if investors defer purchases of US assets in anticipation of a weaker dollar, which in turn accelerates dollar weakness.The dollar has fallen more than 4 per cent against a basket of world currencies in the past month, and financial markets sense that a lower dollar may be the only route to keep attracting foreign money and lifting US exports.Even some Federal Reserve officials, who normally shun comment on exchange rates, have indicated a lower dollar is likely, if not inevitable.If this downtrend continues and Asia resists, then the risk for Europe of a US policy of “benign neglect” is high.”I don’t see a nice way out of all this,” said Kenen.”I can see a collaborative way out but that is not the way this administration operates.”RISK OF GOING IT ALONE Statements this year by the G7 powers — the United States, Japan, Germany, France, Britain, Italy and Canada — agreed that disorderly exchange rate movements were not desirable and that Asia should pursue greater currency flexibility.The first part was prompted by a European desire that the euro not rise unduly due to needed dollar depreciation against Asian currencies.The US has its biggest deficits with Asia.European Central Bank chief Jean Claude Trichet repeated this on Thursday and said the US had a strong dollar policy.But if Asia doesn’t budge and the US distances itself from the whole issue, Europe could suffer.Peter Morici, business professor at Maryland University, said he believes the Asia exchange rate conundrum will not be a priority for a new Bush government.- Nampa-Reuters