Financial Times reports on Russia''s flirtation with the euro

Section:

http://story.news.yahoo.com/news?
tmpl=story&cid=1518&ncid=1518&e=3&u=/afp/20031008/bs_afp/us_economy_fo
rex_031008201123

WASHINGTON (Agence France-Presse) -- The US
administration has embarked on a risky strategy to
bring down the value of the dollar as part of an
effort to keep a fragile economic recovery on track.

Analysts say the US effort could alleviate some
economic woes, but that if not handled correctly
could scare off foreign investors needed to finance
the country's massive trade and investment deficits.

The greenback, which has been on a downward trend
for months, accelerated its move after last month's
Group of Seven meeting in which the world's economic
powers called for more exchange rate flexibility -- an
effort widely seen as calling for a weaker dollar.

"There is little doubt that there is a strong consensus
in the markets that US policymakers have decided to
push the dollar lower as a policy lever to complement
stimulative monetary and fiscal policies adopted during
2003," said Citibank chief currency strategist Robert
Sinche.

A weaker dollar, long sought by US industry, would
make US products more competitive and boost profits
for US multinationals.

It would also ease worries about deflation by making
imports more expensive, and over time could curb the
massive US trade deficit that has allowed Asian nations
to build up massive dollar reserves.

The US current account deficit, the broadest measure
of trade and investment, hit 503.4 billion dollars last year
and is still growing.

"The problem with this imbalance is that the US is
borrowing from the rest of the world, largely from Asia, to
finance the current account deficit," according to an
analysis by Wachovia Securities.

"For now, foreigners seem content to accumulate more US
assets. However, this willingness clearly has its limits, and
it will begin to be tested if the net indebtedness of the US
continues to rise."

But a weaker dollar has long been fought by US trading
partners like Japan, which has been in a constant battle to
keep the yen from rising to help its own exports.

And while the lower dollar could be a boost for the US
economy, it could mean the opposite for sluggish
economies elsewhere.

"Excess US dollar weakness (at this point) is a bad thing
for everyone if it threatens the broadening out of economic
recovery from the leader (the US) to the laggards (Europe
and Asia)," said Smith Barney analyst Matthew Merritt.

A big risk for the US strategy is that the falling dollar could
become self-feeding, prompting more investors to move
away from dollar-denominated assets like stocks and
bonds, fueling a crash in the dollar and financial markets.

The US administration has been sending the message --
reiterated Wednesday by the White House -- that its
"strong dollar" policy remains unchanged.

But some analysts see this as a way of making the
dollar's decline more gradual, or orderly.

The dollar hit a fresh three-year low against the yen this
week, falling below the symbolic level of 110 yen, and the
euro has begun creeping back towards its all-time high of
1.1933 hit earlier this year.

But Morgan Stanley analyst Stephen Jen says fears of a
dollar collapse are unwarranted.

"The rest of the world is too weak to absorb a large dollar
correction," he said.

"If the dollar falls by 30 percent, the US' partner currencies
should rise by 30. In response to the prediction that the dollar
must crash, I ask 'against whom?' Which economy in the
world can, now or in the next year or so, withstand a 30
percent appreciation in their currency?

"If the euro area and Japan were stronger than they are now,
these levels might be possible. But we have still not yet fully
emerged from a synchronized global recession ... Unless
Japan and Euroland simultaneously make a huge policy
mistake of allowing this to happen, they will intervene
massively to prevent the dollars from weakening so much
now, in my view."

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