NCPA - National Center for Policy Analysis

Whither the Dollar?

October 10, 2002

Over the past two years, the U.S. dollar has remained remarkably strong despite the nation's economic tribulations. But many experts predict the dollar can't stay strong much longer. America's net foreign debt has reached a quarter of gross domestic product, and the current account deficit hit 5 percent of GDP last quarter -- both the highest levels since at least the Civil War.

The question is whether the dollar's coming fall will be orderly or chaotic.

  • The International Monetary Fund warns that continuing imbalances in the U.S. and global economies could spark "an abrupt and disruptive adjustment of major exchange rates."
  • According to economist Stephen S. Roach of Morgan Stanley, the odds still favor a gradual dollar decline lasting several years -- assuming the adjustment begins relatively soon.
  • Economist Martin Neil Baily of the Institute for International Economics predicts a 20 percent to 25 percent decline in the dollar's inflation-adjusted exchange rate over five to six years.
  • This would produce a decline in real GDP growth of 0.25 percentage points and a drop in annual growth of consumption and investment of 1 percentage point and 2 percentage points respectively.

Roach says that the longer the dollar stays at today's lofty levels, the greater the chances of an abrupt dollar collapse -- which would precipitate double-dip recessions in the U.S. and Europe.

Source: Gene Koretz, "Economic Trends: Tracking the Dollar's Fall," Business Week, October 14, 2002.

 

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