People's Daily Online -- Dollar fluctuations have different impact inside and outside the U.S.

リンク: People's Daily Online -- Dollar fluctuations have different impact inside and outside the U.S..

Since late November, the US dollar exchange rate index (level of 1973 = 100) continued to decline and broke through the support line of 85 and hit 82 in early December, a drop of nearly 32% from the 121 in July 2001. A view from the US financial circle holds that the next support line would be 80, which is the bottom line in the past 30 years. By breaking through this line, the dollar might crumble. Nevertheless, there is also the other opposing view that as long as the double deficit problem is not resolved, it would be hard to contain the slide of the dollar, but its devaluation will be orderly and undulating. So the possibility for plunging the dollar into a crisis is limited.

The impact of the dollar's fluctuations on the economy can be observed from both static and dynamic aspects. Statically, the strength of the dollar exchange rate has very different meanings for the US economy and global economy. A strong dollar adds luster to the United States and helps increase its superpower status. It is conducive to attracting foreign investment and helpful to the merging and acquisition of US firms overseas and enhancement of the purchase power of the Americans worldwide. But in the meantime, as one of the causes to expand the trade deficit, it is not good for the export of the U.S. In addition, American firms will shrunk their benefits when remitting their profits home from overseas. Externally, a strong dollar is a powerful magnet for overseas investors. People are willing to use dollar as the currency for settlement, which will help hold and increase the value of dollar-denominated assets. Given the price advantages of foreign goods and services in the United States, people are ready to invest or seek jobs in the US market to earn more dollars.¡¡¡¡

Dynamically, violent fluctuations in the dollar exchange rate will produce a great impact on the world economy. It increases the uncertainty for the prospects of investors and hence affects their decision-making. The cost of international trade transaction will rise with exchange rate fluctuations. Foreign debtors and dollar-dominated assets holders face more a severe impact. In addition, fluctuations in the dollar exchange rate would avail international speculative capital of an opportunity, resulting in upheavals at the financial markets of various countries.

At present, peopled are concerned with the impact of sustained, widening US current account deficit on the dollar exchange rate trend. Six global financial crises that had erupted in the 1990s were all relevant to international payments imbalance. Experience shows there is the risk for a financial crisis when a nation¡¯s current account deficit exceeds 5% of its GDP. The US current account deficit reached $791.4 billion in 2005, or about 6.4% of its GDP, which exceeds the safety line of proponents of empiricism. So far, except for a weakening for the dollar, there are no signs of a drastic fall in the value of the dollar or financial disorder. This is possibly related to the ensuing factors:

First, the US economy has a very large base, with its GDP reaching $12.5 trillion in 2005. Given its total external debt hitting about $2.5 trillion, its debt rate turned out to be 20.4%. According to international warning indicators, the debt ratio should be kept within 20% to 30%, in term of differing specific national conditions. Therefore, although the US current account deficit hit a record high in 2005, it remained in the safety category.

Second, trade imbalance is related closely to a rapid economic growth. The faster the economy grows, the bigger the deficit is. After the Federal Reserve tightened its interest rate policy, a higher interest rate has provided a prop for the dollar.

Third, Trading partners of the United States have intervened and help maintain the relative stability of the exchange rate, in order to curb landslide in possible export to the U.S.

Fourth, generally speaking, the devaluation of the US dollar will cause huge losses to the countries and economic entities that hold large sums of US dollar assets, and so they would not sell their dollar assets when the dollars is weak.

Fifth, since most powerful international financial speculators are in the United States, they will not wreck dollars only to eat their own bitter fruit. And they are not strong enough to challenge the Federal Reserve.

For the above reasons, the dollar will turn weakened when the US foreign debt is on rise. But the possibility for a sudden crumble for the dollar is unlikely. In view of the important impact of the dollar exchange rate fluctuations in the international economy, it is a very crucial topic to pay close attention to the value of the dollar and guide against any risks with regard to dollar exchange rate.

Translated by People's Daily Online. The author Chen Baosen is an honorary academician of the Chinese Academy of Social Sciences