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Issue #586 | Latin America Trade | Canada Ports

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2014 Media Kit
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US dollar must fall more to ease imbalances

By: | at 07:00 PM | Channel(s): International Trade  

The US dollar needs to depreciate more against other major currencies to ease unsustainable trade and current account imbalances, a panel of influential economists said during a meeting of the American Economics Association.

“Though the dollar has come down…it’s clear from the fact that the trade deficit continues to grow that the dollar is too high,” said Martin Feldstein, professor at Harvard University and former chairman of the Council of Economic Advisors under President Reagan.

According to Feldstein, the still-high dollar is due to “errors” by financial markets such as the view that the US economy will continue to outperform other major economies and that foreign purchases of Treasury securities are coming primarily from the private sector, when they actually are coming from governments.

Former International Monetary Fund Research Director Michael Mussa, now with the Institute for International Economics, concurred that the dollar needs to come down more, estimating that the US currency would need to decline another 20% in order to help the cut the US current account deficit in half.

The current account deficit - the broadest measure of trade - comprises about seven percent of US gross domestic product.

Mussa divides economists’ interpretation of that deficit into two camps: those who attribute it to excess global savings that will persist for some time and those who think overseas investors will yank their holdings of US assets and sharply lower the dollar.

Mussa is somewhere in the middle. “Substantial” US current account deficits will persist for some time, he estimates, but they can’t keep growing as a share of the economy.

Columbia University Professor Robert Mundell said the US current account deficit is likely to persist, “‘until the dollar is replaced as the de-facto (world) reserve currency.”

While there are signs that some foreign investors are becoming less willing to add to their dollar holdings, “‘the risk of a disruptive dollar crash is not particularly great,” Mussa said.

Feldstein cautioned against relying solely on exchange rates to solve the current account deficit, noting that US national saving needs to rise as well. (Dow Jones & Company, Inc.)