The good and bad of weak $$$
Economic experts believe that the American administration is not really interested in a strong US dollar. There is even indirect evidence to prove that. Bush’s administration is probably going to repeat the scheme, which was used 25 years ago. Washington ProFile news agency reminded that it was the time of the so-called Reagan’s weak dollar.
The USA gained the support from industrially developed countries of the Group of Five (G-8 nowadays) in September of 1985. The states started the process of cheapening US dollar vs. major currencies of the world. Dollar lost 50% of its value within the period of two years in comparison with the price of German DM and Japanese yen. This simultaneously resulted in the growth of the American export – it gained 22.2%.
President Bush is likely afraid to repeat his father’s mistakes and to lose political scores and even the White House, maybe. That is why he is likely to use several elements of “Reagan’s economy,” but Bush is supposed to take into account the wishes from USA’s partners. The reduction of dollar is very bad for Japan – its balance of trade will considerably drop, and the process of the extrication from the economic crisis will slow down. Taiwan has the same problem.
The countries of the European Union actually win from the growth of the euro rate. However, a strong euro is capable of hampering the economic growth in those countries: expensive European goods will lose their competition on the international market. That is why China, South Korea and several other countries are working on the dollar replenishment of their gold and value reserves. The central banks of a lot of countries of the world are maintaining the high dollar rate on their home markets.
The reduction of dollar is not good for the countries, whose currencies are not struggling with dollar, euro and yen for the title of the most popular currency of the world. Their balance of trade with the USA and with each other will change, since the considerable part of commercial transactions is performed with the use of dollars. The growth of the rates of national currencies vs. dollar is absolutely not good for the majority of the states, because it will cause damage to their balance of trade, and increase the volume of the foreign debt. The countries, which export oil and other energy carriers, including Russia, Kazakhstan, Turkmenistan and Azerbaijan, might experience trouble as well.
“Reagan’s dollar” did not last long, though. In 1987 the countries of the Group of Six agreed to decrease the speed of reduction of the American currency. This decision was not profitable for the US export – this index dropped six times in six years. Dollar gained 28% vs. 34 major world currencies in the 1990s.
A strong dollar played a positive role for the USA too: the American export was getting more expensive, import was getting cheaper, the USA was keeping the acceptable foreign trade balance. Furthermore, the cheap import allowed the USA to successfully struggle with inflation rate.
Economists argue, if the current reduction of US dollar is good for America or not. Some experts believe that the reduction of dollar will not show any considerable influence on credit rates and therefore, on the state of things on the labor market.
The inflation rate in the USA is under the strict control, the interest rates are on the lowest level over 40 years. Now the American economy is stronger than the economies of the European Union and Japan. That is why the reduction of dollar rate will only play a positive role, activating the American export and providing three percent of the economic growth. This is what experts believe. A weak dollar will give an incentive to foreign investors to buy cheaper shares and other assets of American companies.
There is also the opposition opinion on the matter. Some financial analysts think that a weak American dollar was jeopardizing the American economy. If US dollar gets weaker, then foreign investors get rid of the stocks of American companies, thinking that it is the vestige of economic weakness, which will result in the economic setback of the whole world.
American consumers provide about a quarter of the world sales. If they get poorer, and if import goods get more expensive, then European and Asian exports will have severe problems.
The American stock market is the largest in the world, and its problems will automatically result in the problems of other stock markets of the world.
Sergey Borisov PRAVDA.Ru
Translated by Dmitry Sudakov