Another day, another fall in the dollar
The White House wants a strong greenback but the US deficit is weighing heavily
Ashley Seager
London Guardian
Wednesday, November 29, 2006
The dollar came under pressure for the fifth day in row yesterday as further evidence of weakness in the world's largest economy emerged and as a key international body warned that the US economy was running out of steam.
Henry "Hank" Paulson, the US treasury secretary, reiterated on a visit to London that the Bush administration remained wedded to a "strong dollar" but this failed to stem the tide as dealers bet that the long-expected slump in the greenback's value had finally arrived.
Having recovered some lost ground late on Monday, the dollar set a fresh two-year low of just above $1.95 against the pound in hectic trading yesterday. There is widespread speculation that it could soon breach the $2 level - something it has not done for 14 years. It also slid to a 20-month low against the euro of $1.318. The US currency has now shed 11% of its value against the euro this year and 12% against the pound.
In reality, though, the dollar has been falling steadily for four years. On a trade-weighted basis against a basket of other currencies, it has lost nearly 31% of its value as fears over its giant current account deficit drag on the currency.
A big deficit, caused by Americans consuming more goods from abroad than they export, theoretically pushes a currency down until imports become more expensive and exports cheaper, at which point the deficit is reduced. But the dollar has held up because big exporters to the US, such as China, have used their current account surpluses to reinvest in American assets, thus keeping demand for dollars high.
Indeed, the dollar surprised everyone in 2005 by regaining some of the losses of the previous three years and so is still not back to the lows it visited at the end of 2004, in spite of the recent falls.
A weaker dollar means a shopping bonanza for Britons. Airlines and travel firms have seen a surge in bookings as people rush to take advantage of cheap US goods that just got cheaper. The flipside, though, is for British companies such as Jaguar to get hit hard in the American market if prices in dollars rise.
