For two weeks, the dollar has been hammered as foreign buyers
shun the US currency.
As a result, the Canadian "loonie" is at its highest point in 30
years. The British pound is at its uppermost level since last
September. Even the closely managed yen is at a six-month peak.
If the dollar were to continue falling, it could have wide
* It could imperil the economy next year because Fed Chairman Ben
Bernanke might have to defend the currency with higher interest
* A lower-valued dollar makes imports more expensive, possibly
ratcheting up the inflation rate. But it could also stimulate US
exports, thus providing more jobs.
* This summer, Americans traveling abroad will feel as if
everything is expensive. However, foreigners coming to America will
feel as if the country is one giant Wal-Mart.
Behind the falling currency is a changing global economy. As the
US Federal Reserve appears to be near the end of its round of
interest-rate hikes, foreign banks are starting to hike their rates -
which puts foreign currencies in higher demand, thus making the
dollar less attractive. Thursday, in fact, the president of the
European Central Bank indicated that rates could rise in Europe next
month. At the same time, the giant US trade imbalance has produced a
huge outflow of dollars to other countries, as well as the need to
finance the ever-bigger US deficit. The deficit has attracted
increasing scrutiny, most recently at a meeting of finance ministers
in Washington last month.
In addition, the central banks of some foreign countries, which
are key in financing the US deficit by buying US Treasury bills, are
now less willing to do so. Instead, they're diversifying their
reserve holdings with euros and yen.
"We seem to have reached a crossroads," says Anthony Chan, chief
economist at JPMorgan Private Client Services in Columbus, Ohio.
With foreign interest rates on the rise, he says, it will become
harder to finance the US current account deficit.
Last year, the trade deficit in goods and services hit a record
$726 billion, as US imports far exceeded exports. The gap has now
reached 7 percent of the nation's gross domestic product, says
Robert Scott, senior international economist at the Economic Policy
Institute in Washington.
A big part of the rise - some 63 percent - is because of the
surging price of oil. US energy officials expect the price to remain
at these levels, if not higher, for some time.
The largest non-oil deficit is with China, which last year
recorded a $202 billion surplus with the United States. On April 21,
the world's finance ministers issued a statement calling for
"exchange rate flexibility" in emerging economies with large current
account surpluses, "especially China."
On Wednesday and Thursday, finance ministers in Japan and Europe
tried to stem the dollar's fall. …