ShareThisThe acceleration of the U.S. dollar's decline in recent days is creating anxiety for exporters in Canada, Europe and Japan. But in the search to create a post-crisis economy that's less prone to financial catastrophe, the U.S. dollar's decline is widely accepted as a necessary ingredient.
Before the crisis, countries grew overly reliant on U.S. consumers, who created an unsteady platform for the global economy based on debt-fueled spending supplemented by a favorable exchange rate. Now, policy-makers in the Group of 20 nations are trying to spread out consumer demand to Asia and elsewhere, a process that will both result in, and be facilitated by, a weaker dollar.
"What's wrong with the dollar weakening?" said Sophia Drossos, a currency strategist at Morgan Stanley in New York and a former economist at the U.S. Federal Reserve . "There needs to be a rebalancing. I think it's moving in the right direction."
An index that measures the value of the U.S. dollar against six major currencies fell to the lowest in 14 months Tuesday because investors seeking short-term gains are gaining confidence in the global recovery.
When the world economy appeared on the verge of collapse last autumn, investors rushed to the dollar, seeking safety in a legal tender that's accepted most everywhere and backed by a government that has never defaulted on its debt.
A year later, investors are back on the hunt for yield, selling their dollars to buy everything from futures contracts on commodities, to European debt, to Brazilian reals -- anything that looks better over the next few months than the assets of a country with a record budget deficit, a benchmark interest rate near zero and one of the slowest growth rates among major economies.
But that kind of pain is what policy-makers accepted when they pledged last month at the Group of 20 Summit in Pittsburgh to adopt -- and in some cases, resist -- policies that will reshape the global economy into something that is less prone to financial meltdown, if a little less dynamic.
For Americans, the falling dollar will make imports more expensive, curbing the American consumer's impulse for debt-fueled spending. At the same time, the country's battered manufacturing industry should get a lift as its exports become more competitive, offering the hope of employment in an economy badly in need of jobs.
In the same way that a crisis in the world's largest economy sunk the world into its deepest recession since World War II, a rebound in the United States should translate into stability elsewhere, investors and economists said.
"This is kind of good for the global recovery," said David Baskin, president of Baskin Financial Services in Toronto, which manages assets worth about $300-million. "It's unclear to me that you can have a U.S. recovery and have no one else recover."
Paradoxically, the U.S. dollar's weakness is the result of rising confidence in the global economy's prospects. The drop picked up speed last week when the Australian central bank raised its key interest rate, citing a strengthening global economy, especially in Asia.
The longer-term benefits of a weaker U.S. dollar will test the resolve of politicians who face explaining them to constituents who will bear the brunt of the short-term pain.
Baskin said he fears the gyrations in foreign-exchange markets will stoke reactionary policies aimed at protecting exporters, but which will ultimately end up slowing trade and the recovery.
(Distributed by Scripps Howard News Service, www.scrippsnews.com.)
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