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Transatlantic rift grows over falling dollar
From the Financial times, EFL & subscription required for full article. Iâve been watching the fallout from currency prices for several months now. France is co-ordinating efforts with Germany to ensure that next monthâs meeting of Group of Seven finance ministers sends a strong signal on the need for stability in the currency markets. âstabilityâ here means they want Euro-priced goods to be competitive against $-priced goods and they donât want to change their central bank policies to get there But both countries are facing an uphill task in persuading the US administration of the need for G7 action to correct the steep decline in the dollar against the euro. The growing rift was highlighted on Tuesday when Alan Greenspan, chairman of the US Federal Reserve, played down the dollarâs weakness and repeated his view that he saw no problem in funding US deficits. His comments came just a day after Jean-Claude Trichet, the European Central Bank president, signalled his disquiet at the euroâs rise against the dollar, insisting it had been "brutal" and a sign of "excessive volatility". Speaking in Berlin, Mr Greenspan said he saw "little evidence of stress funding US current account deficits". In fact, there has been a small rush TOWARD US bonds in anticipation of economic improvement in the US, despite lower interest rates here. Counterintuitive, but itâs happened before & bespeaks confidence that the US will remain a leading global economy. He said the dollar had fallen broadly against other currencies. He conceded that the dollarâs steep decline had put eurozone exporters under pressure but noted it was not fuelling inflation, which remained "quiescent", or endangering the global recovery. His comments drew heavily on speeches he made two months ago when he stressed the dollarâs decline had created no "measurable disruption" and warned it was vital to thwart creeping protectionism. Over the past year the euro has risen more than 20 per cent against the dollar. European policymakers fear that the relentless rise of the euro could put the eurozoneâs fledgling export-led upturn at risk. It wasnât so long ago that Eurocrats threatened trade sanctions targetted to hurt Bushâs re-election prospects. The controlled fall of the dollar is a much more subtle but effective counter-thrust. Most analysts believe the Bush administration favours a weaker dollar to help domestic exporters and narrow the ballooning trade deficit. It would be loath to see a dollar rise just ahead of the presidential election. "It will be pretty hard to get the US on board [at the G7]," said Mark Cliffe of ING. " The US is on a global growth campaign and the ball is now very firmly in Europeâs court." This is the money quote. He said the ECB might have to cut interest rates before the US was prepared to sanction any G7 concern about exchange rates. Not too long ago, Eurocrats were chuckling over prospects that investment money would flow from the $$ to the Euro and that major industries would start pricing products in Euros instead of dollars. If they have to lower their interest rates to try to deal with the major structural problems that haunt the Eurozone economies, the $ may well continue to be attractive despite the projected deficit spending. There are other side-effects of a lower $. The value of outstanding Treasury debt drops when the dollar is lower against other currencies. Not a trend we want to go too far, but in the short run and to a limited extent, this is a very effective tactic to indirectly have those debt holders help to pay for the war on terror. Since some significant portion of that debt is probably held by oil princes, there is also a certain amount of poetic justice here. As with most aspects of macroeconomics, this can all be carried too far: we want our debt to be considered worth holding and we want there to be global consumers who are wealthy enough to buy our products and services. But I somehow doubt that the French and Germans will get much of a sympathetic hearing at the G7 meeting given how flagrant their gloating was last year. Germanyâs issue is deeper in that, since the rampant inflation of the early 20th century, their banks have always favored stability over growth. But that comes at a major cost with the post-war generation aging - without growth it will be very hard for them to meet their pension etc. obligations. Posted by: rkb 2004-01-14 |
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