The Too Strong Dollar?
Subject Monetary Policy
Exchange Rate
Topic International Finance
Monetary Policy
Key Words Depreciation, Appreciation, Exchange Rate, Trade Deficit, Economic Growth
News Story

After years of assuming that a strong dollar was good for the U.S. economy, many economists are calling for the Bush Administration to reexamine its policy. They argue that the current strength of the dollar is hurting exporters, causing unemployment and reduced profits in those firms. Foreign investors, they also argue, may lose confidence in the dollar and a mass retreat from the dollar may harm markets and our economy. The Bush Administration has stated that it has no plans to either directly intervene in the currency market or try to influence investors by making statements that it believes the value of the dollar to be too high.

As long as the U.S. economy was growing, complaints about lost export sales were muted. Now that the economy has slowed, the loss of export sales reduces profits and results in firms having to lay off workers. With an economy tottering between slow growth and recession, added layoffs could be the deciding factor. The National Association of Manufacturers and the American Farm Bureau are likely to be putting pressure on the Bush Administration to change its strong-dollar policy.

Former Treasury Secretary, Robert E. Rubin, has stated, "Modifying our strong dollar policy could adversely affect inflation, interest rates and capital inflows, and would lessen the favorability of our terms of exchange with the rest of the world." At the same hearing, former Feral Reserve Chairman Paul A. Volcker stated that he believes long-run stability will require a decline in the value of the dollar.

Economists are paying much more attention to the current account deficit, which has risen considerably in recent years. It now amounts to 4 percent of gross domestic product (GDP) and, despite the economic slowdown, shows no sign of falling. Economists worry that foreign investors will judge the deficit to be a financial risk and reinvest their funds in other countries. If that were to happen, the dollar would fall precipitously, disrupting financial markets and increasing inflation.

(Updated September 1, 2001)

1. If the Bush Administration were to decide that a strong dollar was no longer in its interest, what measures could it adopt to depreciate the dollar?
2. It is argued that European and Asian automakers have greatly benefited from a strong dollar. Explain how a strong dollar would hurt U.S. auto manufacturers and favor foreign firms.
3. What is the current account deficit? Why do some economists worry about the size of the deficit?
Source Richard W. Stevenson, "More Experts Grow Wary As the Dollar Keeps Rising," The New York Times, July 31, 2001.

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