Dollar decline disconcerting

The wild swings in global exchange rates are worrying the financial and economic policymakers around the world. After two years of recession, falling equity markets and economic confusion, it is believed that the world exchange rates might be the next source of economic turmoil. Many economists recently have been primarily concerned with the euro-dollar parity.\n"So far the dollar's slide has been fairly gradual: it is down by 13 percent in trade-weighted terms over the past year, though it has dropped by almost twice as much against the euro since its 2001 peak," according to a Jan. 30 article in The Economist.\nBut it is also arguable that a weak dollar can stabilize the world exchange rates, since the dollar has been overvalued for years. A long-run weaker dollar might be beneficial for the world economy. Moreover, a weaker dollar might facilitate and reduce the current account deficit here in the United States, making American exports cheaper for foreigners. (The United States has a massive trade deficit that may soon reach 5 percent of the Gross Domestic Product, the total amount of goods and services produced by the United States over a given time period).\nExchange rates determine the cost of traveling abroad, importing goods and services, capital imports and foreign investment for those who can afford it. The concern is valid. Changes already affect students in Bloomington; those who drink foreign beer may have noticed the increase in price. Lately, European beer has been more expensive for U.S. importers (because of the appreciation of the euro and the depreciation of the dollar) although the phenomenon did not last too long because of the fierce competition of U.S. beer products. But the weaker dollar also has some positive effects on the U.S. economy (i.e. domestic car industries can benefit from a depreciating dollar because foreign cars will become more expensive for U.S. consumers, which will increase sales of domestic manufactured cars).\nVolatile exchange rates hurt companies and investors by making it complicated to set prices, influence costs and forecast revenues. Despite that many investors to some extent protect themselves against "short-term" currency swings by hedging their foreign-exchange investments; it's nearly impossible to do so in the long run.\nOne reason for the decline of the dollar is the U.S. economy remains the only growing economy in the world today. In the past, a strong dollar coincides with large capital inflow into the United States (i.e. During the boom of the 1990s it was not a problem, as investors from around the world were anxious to get a share of the profits that were made in the U.S. stock market.) This scenario changed with the decline of the net capital imports along with the corporate scandals in the United States. (see Enron or WorldCom). Furthermore, both the European and Japanese economies have been growing relatively slowly in the past year with an almost "Flat GDP." The Economist GDP forecasts for 2003 show some growth in the European and Japanese economies, which are not even close to the projected growth in the U.S. economy (Euro Area +1.3 percent per year, Japan +0.2 percent per year, U.S. +2.5 percent per year)\nAnother reason for the murky situation of the dollar is the war threat. It is true that war talk makes the dollar worse off because of the many commodities around the world that are priced in dollars. If the Iraqi standoff drags on or the United States gets pulled down in a long war, the dollar could plunge further. If there is a war in Iraq and the dollar declines, this will in effect turn interest rates in the United States aggressively upward; the loss in the dollar value then will force the Federal Reserve to increase interest rates to prevent further slumps of the dollar. \nIt is when confidence in the United States is shaken that the dollar suffers. A destabilizing event could create a disadvantageous shock and cause the U.S. dollar to decline further. The latest swing in the exchange rate pendulum and the uncontrolled dollar downhill may have serious negative long-term effects. But a calm, orderly fall in the dollar won't do much harm.