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Monetary Experts Generally Endorse US Dollar Decline - 2003-07-22

A panel of monetary experts met Tuesday at a Washington think tank and generally concluded that the year-long decline of the dollar against other major currencies is a good thing and likely to continue.

Kenneth Rogoff, chief economist at the International Monetary Fund, says the dollar's 10 percent decline over the past 18 months is a healthy development. He and other panelists at the American Enterprise Institute forum believe the dollar will continue to fall, particularly against the euro over the next year or two.

Ted Truman, a former U.S. Treasury and central bank official, applauds the dollar's decline, saying it is necessary to correct a previous overvaluation and reverse a growing and destabilizing trade deficit.

Major currencies for the past 30 years have had their exchange rates determined by market forces in what is called a floating rate system. The foreign exchange market where $1 trillion of currencies trade daily is the world's largest.

Michael Rosenberg, exchange rate forecaster at Deutsche Bank, said the dollar's current decline mirrors earlier up and down cycles. "Dollar up cycles tend to share one characteristic - driven by economic booms like we saw in the first half of the 1980s and the last half of the 1990s. Dollar down cycles tend to be driven by [lower interest rates], Fed [central bank] policies or by massive U.S. trade imbalances. In the current down cycle we've got both," he said.

The panelists believe the major impact of the dollar's decline will be absorbed by the euro, the common currency of 12 European Union countries. Mr. Truman believes the euro will rise to $1.50 from the current $1.19 level. He says the euro's rise will depress economic growth throughout western Europe.

Japan and China, say the panelists, oppose a corresponding rise in their currencies and actively intervene in the markets to prevent it. Mr. Rosenberg of Deutsche Bank however believes eventually both countries will accede to U.S. wishes and permit their currencies to appreciate.

Desmond Lachman, a resident scholar at the enterprise institute, believes the current slide in the dollar carries risks for the global economy. It is, he says, a delicate period since there is now, for the first time in 20 years, a synchronized global slowdown and huge trade imbalances, with the U.S. in deficit and China and Japan with huge surpluses.