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Is the dollar a sinking ship?


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Is the U.S. dollar a sinking ship?

Its decline to a nine-year low is affecting everything from the price of goods at Wal-Mart to the vigor of Europe's economy.

By The Christian Science Monitor

The sinking U.S. dollar in recent weeks has raised what is suddenly a top concern from Washington to Berlin and Beijing: Is America's currency undergoing a benign adjustment or a precipitous plunge?

So far, the dollar's slide to nine-year lows doesn't reflect panic. But some analysts say a run on the dollar is possible. And even an orderly drop could affect everything from mortgages to prices at Wal-Mart.

The good news for Americans: It's getting easier for manufacturers to sell products overseas, and more likely that tourists from Germany will flock to U.S. national parks.

But the downside could be significant. America, the world's leading importer of goods, is now buying them at higher prices. And if the dollar's dive makes foreign investors wary, U.S. interest rates may have to rise to attract buyers of federal debt.

More broadly, it's a shock to the global economy. At a November meeting, officials from the Group of 20 industrial and major developing countries called for the United States to cut its federal deficit, which is seen as a key factor in the dollar's fall.

"There's a lot of speculation," says Michael Schubert, an economist at Commerzbank in Frankfurt. He sees some signs of a "herd instinct" developing.

Less hope after election

The dollar is now down about 50% against the euro since October 2000 and recently hit its lowest level since 1995 against a basket of foreign currencies.

While the shift isn't entirely new, it has accelerated since President Bush's re-election. Some observers say the timing reflects concern that Bush -- with his emphasis on tax cuts -- won't be able to rein in record budget deficits.

"The general perception was that under the Bush administration there would be less concentration on tackling the two deficits," says Richard Reid, European economist for Citigroup, the world's largest financial institution.

He was referring to the $412 billion budget deficit and the approximately $600 billion trade deficit the United States ran in 2004. A trade deficit must be financed by other nations willing to hold U.S. currency. And foreign investors have also been buyers of federal debt in recent years, helping to keep U.S. interest rates low. But the trend in these deficits now looks unsustainable to many. If those investors sour, even somewhat, on holding U.S. debt, the Treasury may need to offer higher interest on its bonds. The ripple effects, in turn, could dampen U.S. economic growth.


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I think that a weaker dollar will help US exports, and help to lower the trade deficit. I hope that Congress will make an effort to lower the national debt with fiscally responsible budgets. I know that they recently rasied the debt limit again. Perhaps this will be the sign that the trends are unsustainable in teh long run and need to be changed?

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I also think a weak dollar is good for the United States. It definetly will have a positive effect on exports. The national debt is another issue though. I think the trend is more related to natural business cycles than anything else, although there needs to be some major overhauling done in areas like taxation and paying off the national debt. Finland payed off all of their national debt around 2000. As a result, citizens in Finland pay outrageously low taxes while maintaining state-of-the-art facilities in education and healthcare. I think a lot of problems in the U.S. could be solved if we would just buckle down and pay off the debt.

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