Dollar will continue to depreciate

Dollar will continue to depreciate

December 15, 2006.

At the end of last month, the US dollar against the Euro depreciated to its lowest in the last 20 months on the New York Foreign Exchange Market, while the dollar against the British pound depreciated to the lowest in 14 years. On Monday, the Euro closed at 1:1.3251 against the dollar and the previous day it closed at 1:1.3200. The pound closed at 1:1.9587 against the dollar and the previous day it closed at 1:1.9525. The dollar to Swiss Francs also fell to 1:1.2014 from 1:1.2049 the previous day.

The weak dollar is a reflection of the long-term depreciation of the US dollar. Over the last three years, the US dollar against the Euro has depreciated by 35 percent and against the Japanese Yen, 24 percent. Since February 2002 against a package of currencies, the US dollar has depreciated by 23 percent.

Various indicators suggest that the US dollar will continue to depreciate. Why?

One of the main reasons for the depreciation of the US dollar depreciation is the slowdown of the domestic economy.

Ge Huayong, Executive Director of the International Monetary Fund in China, told reporters that from a macro-economic perspective, the US dollar will continue to depreciate because of the global economic situation. Various indicators suggest the US economy will slow between the end of this year and the beginning of the next while there is good reason to expect European economic growth. The Japanese economy is showing signs of a revival while the emerging market economies of countries like China and India continue to have strong growth momentum.

The changes in the global economic situation have led to a change in the floating direction of foreign investment, another factor in the depreciation of the US dollar.

Ge Huayong said that from a micro-economic point of view, the main reason for the depreciation of the dollar was market speculation on forex reserves. It was anticipated that some countries with large foreign exchange reserves in US dollars would be looking to reduce their US dollar reserves. The European Central Bank increased the interest rate again to encourage investors to sell their dollars and buy Euro. The US real estate market has slowed leading to a significant downturn in consumer confidence.

Another reason for the depreciation of the dollar is that the US government has not yet intervened. Analysts say the US government has been compliant in the depreciation of the dollar. The depreciation of the dollar promotes the export of US products and reduces trade imbalances. In the long run, the stimulus of demand and an increase in savings will help reduce the double deficit to a point where it is sustainable. In the meantime, the depreciation will substantially reduce the US’ foreign debts. The advantages of the depreciation outweigh the disadvantages, so the government is unlikely to intervene. It is interesting to see that the US government supports the depreciation, but that both US Treasury Secretary Henry Paulson and his predecessor John W. Snow believe that a strong dollar is in the interest of America.

Some American researchers believe that the policy of a strong US dollar has died. The US hopes the dollar will depreciate in an orderly fashion, but are not willing to announce this openly. If they did so, the rate of depreciation would accelerate and the country is unwilling to let the dollar fall so quickly.

US decision-makers believe the depreciation is a good way to resolve imbalances in the US economy. However, the American people are complaining. Domestic goods are very cheap, but due to depreciation, imported products are increasing in price. More importantly, it will be more expensive for Americans to travel to Europe, Japan or any other country. Many people have already abandoned their travel plans to Europe because of the expense.

The depreciation of the US dollar and the appreciation of the RMB have reduced China’s export competitiveness. Due to a decrease in the import of Chinese-made Christmas gifts to the US, there is a shortage of Christmas gifts on the US market. It is expected that Santa Claus might not have so many gifts to send out this year.

The US dollar cannot depreciate too quickly as this would be a big problem for the world economy. British economists say that if the US dollar depreciates too quickly, it will affect the "global bubble". It will cause new inflation pressure so that the banks will not be able to shield the collapse of the real estate market. If that happened, the whole world would be affected.

Ge Huayong agrees with this. He says the US dollar must depreciate gradually in an orderly fashion by just a small margin at a time so as not to affect the world economy. If the dollar depreciates on a large scale, the global economy would have to bear the consequences and emerging economic powers like China would take a heavy blow as much of their foreign exchange reserves are in US dollars.

However, Mr. Ge believes that there are many positive things about the US economy and the complete US financial market which are keeping the dollar stable and the possibility of a crash to a minimum.

By People’s Daily Online

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