8 May 2008

Some Signs of an Upturn for the Dollar

This article is extracted from the 7 May 2008 edition of “The New York Times”.

After six years of stumbling against the euro, the dollar may be showing signs of getting back on its feet.

Two weeks ago, the dollar hit a new low of $1.60 for the euro amid expectations of lower interest rates in the United States and possibly higher rates in Europe. President Nicolas Sarkozy of France and other European leaders expressed alarm over the dollar’s decline and its devastating effect on Europe’s exports.

Since then, the dollar has strengthened — it closed at $1.55 Tuesday — and some economists say that even if it creeps down slightly, the dangers of a precipitous fall, at least against the euro, have subsided.

Economists point out that American policy makers, particularly Ben S. Bernanke, the Federal Reserve chairman, have begun to voice concern about the dollar’s fall and its inflationary effect in the United States, where a weak currency has increased the cost of oil and other imports for the American consumer….

Although many economists consider an all-out collapse of the dollar unlikely, they acknowledge that such a collapse could occur if overseas investors, fearing a relentless decline, start dumping dollars from their portfolios — accelerating exactly what they fear might happen.

While concerned about the dollar’s value against the euro, of course, the United States has taken the opposite approach toward China and some other Asian economies.

The Bush administration, for example, continues to press China to let its currency, the yuan, appreciate against the dollar. The yuan has already climbed more than 18 percent against the dollar since mid-2005, making Chinese goods more expensive in the United States.

That shift, in turn, has eased the clamor in Congress for trade sanctions against China.

But economists say any possible stabilizing of the dollar against the euro can be sustained only if there is a shift in economic fundamentals toward a recovery in the United States and a slowdown in Europe.