June 4, 2007

Dollar Declining, but Not Set to Crash

Economists expect further dollar slide, but say economy remains healthy

Could a dollar crisis, with a precipitous decline triggering grave market volatility, be looming? That's what a panel of experts pondered May 31 at a seminar sponsored by Washington think tank American Enterprise Institute (AEI). The current U.S. deficit totaled about $800 billion in 2006 while China, most notably--where a stock market bubble likely exists--and OPEC countries are running outsized surpluses, noted Desmond Lachman of AEI.

Yet despite these very large imbalances in the global payment system, the dollar's decline has continued to be orderly after its peak in 2002, Lachman said, and his colleagues also expect a smooth ride down.

Economists speaking at the seminar were largely optimistic that, barring a combination of terrorist activity affecting the U.S., a big slump in the housing market, and a loss of confidence in U.S. policies, there is only a remote chance the dollar will crash or that the falling dollar will stymie economic recovery. Still, most analysts who assess the dollar think that the "dollar's got properly another 20% to 30% to depreciate to bring the U.S. balance of payments back to some sort of sustainable level," Lachman pointed out.

"Yes, the dollar could fall further, but if it does, I would just expect a quicker and more responsive reaction, not something that would necessarily go on and pretty soon snowball," added Anne Krueger of Johns Hopkins and, until recently, the first deputy managing director at the International Monetary Fund. That said, global imbalances do exist, but in many ways the U.S. economy and growth rate looks good, she said. She did point to vulnerabilities that should be addressed, such as getting the multilateral world trade system back on track. Krueger also lamented the low American savings rate, and the burden of health care spending on U.S. fiscal accounts as the population ages. "The American economy has performed better, not worse, than expected and in ways that I think give rise to optimism going forward," she said. But the sooner the domestic issues--not the global imbalances or the exchange rate--are addressed, the healthier the U.S. economy will be, she argued.

Reprints Discuss this story
This is where the comments go.