Dollar Falls to New Low for 2nd Straight Day

The U.S. dollar continued its slide against the euro, crossing the $1.35 level on Thursday, then settling further on Friday to close at $1.3548. Although part of the blame for this string of losses can be attributed to the week's less-than-favorable news about the U.S. economy, the long-term trend downward in the value of the dollar against other major world currencies is being caused by the record U.S. budget and trade deficits.

As the dollar becomes worth less and less against the euro and the yen, U.S. exports will become cheaper in Europe and in Japan. Many believe that this is why the Bush Administration has made no meaningful effort to stop the dollar's slide, despite President George W. Bush's statement that he "supports" a strong dollar. European ministers meeting earlier this week made clear their dismay about the current situation.

The Europeans and other U.S. trading partners want the United States to aggressively purchase dollars with other currencies. Ideally, the resulting increase in demand for greenbacks would cause the dollar's value to start rising against those other currencies; and at the same time, the resulting increase in the supply of those other currencies would cause those currencies' values to start falling against the dollar. In practical terms, governments find that the reserves they have on hand fall far short of what would be necessary to strongly turn currency markets around on the sheer weight of such purchases and sales; but the very fact that governments show the willingness and ability to execute sustained and large-scale currency transactions signals world currency traders that the governments are willing to put real money on the line to stop a trend they don't favor.

In the current situation, however, the Bush Administration has shown no interest whatsoever in using its reserves of euros, yen, or gold to sop up the excessively large supplies of American dollars in the world. As noted above, this may be due in part to the desire of the Bush Administration to assist U.S. exporters by making their goods cheaper overseas, while making foreign imports to the U.S. more expensive. Even though such a strategy for helping the U.S. economy might work in the short run, the loss of value the dollar has experienced recently may lead in the longer term to a loss of stature of the currency in world trading, which would in turn encourage global markets to seek another currency like the euro as the basis for denominating international transactions and as the means of choice for storing value that arises from global trade.

Domestically, even though U.S. exporters will likely benefit from the cheaper dollar, American consumers will find that prices of foreign imports here in the United States will be rising, which might tempt domestic producers of competing products to raise their prices, too. Coupled with rising prices for foreign imports of crude oil, U.S. consumers might find themselves spending far more of their net income on necessities, complicating prospects for the kind of sustained, long-term economic expansion the Bush Administration has claimed its free-market, pro-business policies will create.