JUSIPER

 
Economists bearish on the dollar

Posted by Sini

Geithner, Setser, Feldstein. A brief excerpt from the last of those:

The very large current account deficits are now being financed by bonds and shorter term fixed-income funds. Some of this has recently come from OPEC governments and other oil producers that are temporarily placing revenue in dollar bonds and bank deposits until they can spend those funds on investment or consumption. Much of the inflow in recent years has come from Asian governments that wanted to accumulate foreign ex-change to eliminate the risk of speculative attacks of the sort that hurt those countries in the late 1990s. A large amount is coming from China and other Asian governments to stop a falling dollar reducing their net exports. If they decide to buy fewer dollar bonds, the US current account deficit could not continue to be financed at current exchange rates and interest rates.

The US current account deficit increased ... in the first three quarters of last year and is widely predicted to move much higher in 2006. This unprecedented level is equal to 6.4 per cent of US gross domestic product. Experts estimate that the real trade-weighted value of the dollar must fall by at least 30 per cent just to shrink the trade deficit to a more sustainable level of 3 per cent of GDP. Much larger dollar declines are also possible. ...

The current small interest rate differences in favour of US bonds are not nearly enough to compensate investors for the fall in the dollar that is likely over the next few years. ... The dollar must fall faster than these small interest differentials in order to prevent the current account deficit from increasing more rapidly than GDP. ... At some point, that will trigger a shift away from the dollar. Private investors and the governments ... will inevitably shift at some time from dollars to euros or yen ... That that has not happened already reflects investors’ belief that it is still possible to benefit from the interest differentials before the dollar depreciates. That sanguine belief may, however, reflect a serious misunderstanding of the magnitude and nature of the capital flow to the US.

3:21 AM |