NCPA - National Center for Policy Analysis

Strong Dollars And Weak Exports

July 9, 2001

The National Association of Manufacturers and other business groups are pressuring Treasury Secretary Paul O'Neill to intervene in financial markets to bring the dollar down against foreign currencies.

A strong dollar makes goods cheaper for consumers; but it also makes U.S. exports more expensive. The result is a widening trade deficit.

In many cases American businesses are the world's most efficient producers. But their edge in productivity is offset by exchange rates.

The dollar has risen steadily against most major currencies since 1995.

  • In 1995, $1 would buy 94 yen -- today, it will buy 122 yen.
  • One dollar would have bought $1.37 worth of Canadian goods in 1995 -- today, $1 will buy $1.52 worth of Canadian goods.
  • The dollar's value increased 39 percent in the last 6 years compared to an index of other major currencies, adjusted for inflation and weighted by trade, according to the Federal Reserve.

The dollar is rising because demand for dollars is outstripping supply. When the Federal Reserve tightens monetary policy to fight inflation, it strengthens the dollar, especially when other countries follow a looser monetary policy.

The resulting rise in imports, pressure on exporters and bigger trade deficits will become intolerable, if only for political reasons.

In a similar situation in 1985, Treasury Secretary James A. Baker sold dollars from the Exchange Stabilization Fund and bought foreign currencies, while foreigners did the same. This brought the dollar down sharply, which improved the competitiveness of U.S. exports.

Soon, Secretary O'Neill may engineer a new international monetary deal to at least halt the dollar's rise. It may be just the sparkplug the economy needs to get moving again.

Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, July 9, 2001.


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