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Economists Debate Pros and Cons of Weaker Dollar
Daily Policy Digest

International Issues / Currency Issues

Thursday, May 23, 2002
Since December 2001, the dollar has been falling against a broad basket of world currencies. In the past three months it has fallen 6 percent against the euro and 7 percent against the yen. Some economists are hailing the dollar's slide, while others warn against it.

 Here are some aspects of the debate:
  • In the short term, a modest decline in the dollar can help lift economic growth because a weaker dollar makes U.S. exports more competitive in world markets as prices of U.S. goods decline relative to prices of products made elsewhere.
  • But the downside of a weaker dollar can be higher inflation and higher interest rates -- and a precipitous drop in the dollar could cause stock and bond prices to drop sharply as foreign investors pull money out of the U.S.
  • Treasury Secretary Paul O'Neill has repeatedly rebuffed demands that he take steps to devalue the dollar -- stepping back, instead, and letting market forces determine the appropriate level.
Experts say there are several reasons for the dollar's recent decline: the U.S. trade deficit , which stood at a near-record $92 billion during this year's first quarter; the burgeoning federal deficit; corporate accounting scandals; uninspiring corporate earnings; and terrorist fears.

 Source: Jon E. Hilsenrath, "Economists Aren't Sure if Drop in Dollar Is Good, Bad, or Both," Wall Street Journal, May 23, 2002.

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