Dollar reaches record low as European Central Bank may let euro strengthen


Economists Say Dollar Has Long Way to Fall;
15% Drop Urged Against Asian Currencies

By Corbett B. Daly
Tuesday, November 30, 2004

WASHINGTON --- Despite the steady decline in the
U.S. dollar, the greenback is still only halfway
through its adjustment to the level where it belongs
to avoid a global economic crisis, a group of leading
economists said in a new book released Tuesday.

"The exchange rate of the dollar is going to fall.
That's what we have been seeing over the last three
years. That's what we are arguing here will continue,
and the only issue is the extent to which and the
mode to which it happens," said C. Fred Bergsten,
a former Treasury official and co-editor of "Dollar
Adjustment: How Far? Against What?"

Bergsten and his colleagues at the Institute for
International Economics, a leading Washington
think tank on currency matters, argue that the
dollar should continue its fall in an orderly fashion,
particularly against Asian currencies that have not
appreciated against the dollar as dramatically as
the euro and other western currencies.

The dollar's dramatic decline against the euro has
been "extremely lopsided," holding its value more
than it should have against Asian currencies, a
ccording to the book.

The dollar probed a low against the euro before
rebounding Tuesday, in the wake of interest-rate
comments from a top European official and release
of a U.S. report that showed American consumer
sentiment soured.

The euro was worth as much as $1.3331, its richest
dollar value ever, before falling back slightly. Late in
U.S. trade Tuesday, the euro was quoted at $1.3291,
a gain of 0.2 percent against its U.S. counterpart
compared with late U.S. trading on Monday.

The dollar hit fresh lows against the euro for four
consecutive days last week after Federal Reserve
Board Chairman Alan Greenspan said foreigners
might lose their appetite for dollar assets given the
size of the U.S. current account deficit.

In the book, Bergsten and John Williamson argue
that China, Japan, and other Asian nations should
stop intervening in exchange markets, limiting
their participation in the adjustment process.

"East Asia must play a much bigger role, indeed we
would say a dominant role, in the remaining second
leg of the international adjustment of the dollar and
the correction of the international imbalances,"
Bergsten said. The dollar hit its high against the
euro in the summer of 2001.

The Bush administration has been publicly urging the
Chinese government to move to a more flexible
exchange rate regime. China has fixed its currency
at roughly 8.3 yuan to the dollar since 1994. American
manufacturers complain that the fixed Chinese
exchange rate provides an unfair cost advantage to
China's exports and is costing thousands of U.S. jobs.

The economists said the U.S. should drop its public
insistence that the Chinese allow their currency to
move toward a floating exchange rate and, instead,
argue for a stronger, fixed yuan.

"Clearly we are not indifferent. We want it to go up,"
said Morris Goldstein, author of a chapter on China.

The Chinese should revalue their currency and
institute a new peg at a higher value before moving to
limited flexibility and then allowing the yuan to float
freely on the currency markets.

"That's how most countries that have gone from a peg
to a float without having a crisis as a part of the
process have gone," Williamson said, adding that
Colombia, Chile, Israel, and Poland followed that

The problem, of course, is that a stronger yuan
contradicts the so-called "strong-dollar policy"
espoused by Treasury Secretary John Snow and
his spokesmen.

Jawboning the markets "is going to get a bad name
and it may become ineffective in the future if the
secretary of the Treasury continues to declare his
support for a strong dollar, irrespective of the
circumstances," Williamson said, adding "this is
an instrument that also needs to be wielded with
a certain amount of responsibility."

Michael Mussa, a former chief economist at the
International Monetary Fund, said there had already
been "enough" adjustment against the euro in the

"It would be useful as a matter of some urgency to
get some movement in Asian exchange rates,"
Mussa said, adding that his former employer needs
"to be substantially more active" in its oversight of
exchange rate manipulation by member nations.


Corbett B. Daly covers the White House and the
Treasury Department for CBS MarketWatch in


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