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Weak Dollar Boosts US Economy Now, say Analysts - 2004-01-26


The dollar's 20 percent decline against the euro over the past year is being seen as mostly positive for the U.S. economy. It helps U.S. exporters whose products are now cheaper on world markets. But there are worries that at some point a weakening dollar would hurt the U.S. economy.

When top finance officials from Europe, Japan and North America meet near Miami Feb. 7 the dollar will be a main subject of discussion.

Steve East, a broker at Friedman Billings outside Washington, says Americans are seeing mostly benefits from a cheaper dollar.

"So far it's been good. It presumably is one of the factors behind the improvement in the trade deficit," he said. "And so far we've gotten all the good and none of the bad. So, it's a good thing, at least so far."

Usually a declining currency puts upward pressure on inflation as imported goods cost more. However, in the case of the United States many of the imports consumers buy come from China and that country has not permitted its currency to rise against the dollar. The outlook is for continuing low U.S. inflation and interest rates.

But Alex Beuzelin, a currency trader at Ruesch International in Washington sees economic risks from a further decline in the dollar.

"The weakening dollar will start to become a problem for the Bush administration if it starts to trigger weakness in U.S. equity markets, if it starts to trigger upward moves in interest rates, and starts to bring about rising price pressure," he said.

Mr. Beuzelin says so far foreign investors are holding on to their U.S. assets and show no signs of wanting to sell. However, he says if market sentiment shifts to expectations of a further sharp drop in the dollar, the dollar's decline could get out of control.

Economist Steve East says the United States is currently in a very good situation with interest rates and inflation low while the economy is growing at a four to five percent pace. He expects interest rates will remain low.

"Inflation dictates interest rates. And inflation is low and I expect inflation to either stay low or even go a little lower," he said. "And I don't really see any inflation on the consumer level coming back until some time in 2005. So I would agree that interest rates could stay historically low for another year, year and a half."

The Bush administration says it favors a strong dollar but believes its value should be determined by the market. Most currency traders believe the administration is content to see a cheapening dollar.

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