WASHINGTON (Reuters) - The swift decline in the U.S. dollar is addressing two of the most worrisome problems facing the U.S. economy — a gaping trade deficit and looming slowdown — with few ill effects.
Far from calling for any intervention to prop up the greenback, which has fallen some 8 percent against a basket of currencies this year, many economists argue that an orderly slide is welcome, and perhaps one key to ensuring an economic slowdown does not mushroom into a full-blown U.S. recession.
“Why should the U.S. worry about the danger of a dollar meltdown? It’s the solution, not the problem,” said Brian Reading at Lombard Street Research.
Reading estimates that the dollar’s decline will cut $155 billion off U.S. foreign debt this year, as well as boost exports, supporting the domestic economy while reducing gaping trade imbalances that have long frightened economists.
The dollar has been on a downward slope for some five years, but the decline steepened in recent weeks as worries about a U.S. economic slowdown have grown. The dollar .DXY hit a record low against a basket of currencies on Monday.
Even as the slide intensified, the tone from policy-makers remained steady.
When asked about the dollar in a Reuters Television interview on Wednesday, Treasury Secretary Henry Paulson pulled out his well-practiced phrase that a strong dollar is in the United States’ best interest, but currency values should be set in a competitive marketplace.
The International Monetary Fund last week called the dollar’s drop “healthy” and part of a long-overdue rebalancing of global growth.
Economists have warned for years that a gaping U.S. current account deficit could destabilize the economy if surplus-holding countries such as China and the oil exporters decide they no longer want to cheaply finance that debt.
The IMF expects a U.S. current account deficit of $784.3 billion this year, which would be down from last year’s $811.5 billion but still more than double the tally from 2001.
Former Federal Reserve Chairman Alan Greenspan said on Sunday the hefty imbalances should not be cause for “undue” alarm, and said they reflected “the shift in trade and financing from within the borders of the United States to cross-border trade and finance.”
The key concern is not whether the credit comes from foreign or domestic sources, but whether American consumers, businesses and government are taking on more debt than they can handle, Greenspan said.
“I’m not sure where the tipping point is, but we can be sure there is one.
The answer to why the United States appears content to stand by while the dollar slumps to record lows may reside in the nearest washing machine or refrigerator.
Whirlpool Corp (WHR.N), the world’s largest appliance maker, reported poor U.S. sales results this week, yet kept its profit forecast because of strong international demand.
Simply put, the weak dollar makes washing machines — and just about every other U.S. export — more affordable overseas. With domestic demand showing signs of slowing, those foreign markets are vital for the U.S. economy.
Whirlpool said revenue rose 12 percent in Europe, 23 percent in Latin American, and 18 percent in Asia in its recently completed third quarter. Part of the gains overseas were driven by the benefit of converting strong foreign currencies into the dollar, but even without that benefit Whirlpool’s foreign revenues rose. By contrast, North American revenue fell 8 percent.
The wild card in all this is how fast-growing emerging economies and oil-exporting countries manage their own currencies in relation to the dollar.
Greg Anderson, director of foreign-exchange strategy at ABN AMRO in Chicago, said the dollar’s weakness — and the euro’s strength — reflect currency “recycling” as exporters buy dollars and then quickly exchange them for euros to keep their reserves balanced and domestic currency gains to a minimum.
That means even if U.S. policy-makers wanted to intervene, their influence over the dollar may be marginal.
“The U.S. would like to have the IMF be the global arbiter of foreign exchange,” Anderson said, noting that the IMF still views the U.S. dollar as overvalued in the medium-term, and the euro as fairly valued.
“The IMF is saying it’s fair that euro-dollar goes higher,” Anderson said.