Accessibility links

Breaking News

Think Tank Praises Decline of Dollar Against Yen and Euro

The Institute for International Economics, an influential Washington-based think tank, applauds the dollar's decline against the yen and the euro over the past year, saying the realignment will temper trade protectionism and make it easier for U.S. producers to compete.

After a relentless rise in the late 90s, the dollar has lost about ten percent of its value against other currencies in the past 14 months. Against the euro the decline has been even greater, about 30 percent.

Fred Bergsten says the dollar's decline has been positive and non-disruptive. He is hopeful the dollar will decline by another ten percent this year to restore balance to the world economy. Mr. Bergsten says even though U.S. economic growth has slowed, it is still faster than in Europe or Japan, meaning there is little chance of a sudden sharp drop in the dollar.

"Given those two things, the positive outlook for the U.S. economy and the dubious outlook for Europe and even more so Japan, I think there is actually very little risk of the dollar decline accelerating and turning into a free fall," he said.

Mr. Bergsten, the principal author of the report, Dollar Overvaluation and the World Economy, says the dollar's 40 percent rise between 1995 and 2002 greatly aggravated the U.S. trade deficit as U.S. producers were priced out of foreign markets. Another author of the report, General Motors chief economist Mustafa Muhataram, argues that Japan and China should stop manipulating their currencies, deliberately holding them down so their exporters maintain a competitive edge in the U.S. market.

"We're beginning to hear complaints from Japan that China is intervening [in the markets] to keep the reminbi weak and therefore China should be forced to change," he said. "I find that very amusing from a country that has been intervening almost constantly to now call on another country to stop intervening. But the point is we're in a one-engine world and everyone wants to engage in competitive devaluations in order to compete in the one market [U.S.] that is growing."

Mr. Bergsten agrees that Japan has been keeping the yen too low and that China also has been holding its currency artificially low at an informal fixed rate against the dollar. He says it is irresponsible for China to hold more dollar reserves of, which stand at $243 billion, than any other nation except Japan, which holds $436 billion.