US dollar, which previously rose a little, dropped again as the meetings of financial ministers and heads of central bank of the Group 7 (G7) countries (the United States, Japan, Germany, France, Britain, Canada and Italy) just had its curtain fall on Feb. 9. In the international market, the rate of Euro to US dollar reached a two-week high: one Euro to 1.27 US dollars. Obviously, the statement of financial ministers has failed to pump more confidence into the market.
Greenspan: scope for exchange rate to be raised limited
Alan Greenspan, Chairman of the US Federal Reserve hinted two weeks ago that the eased monetary policy will probably and finally be put to an end. In the international market, Euro dropped immediately following his remarks. Ben S. Bernanke, member of the US Federal Reserve also noted that the risk of deflation for the United States has been greatly eased, and the economy is also undergoing a more balanced resurgence. The two notions made people in the market believe that the US Federal Reserve is likely to raise the interest rate, prompting the exchange rate of the US dollar up for a short period of time from one Euro to 1.29 US dollars to 1.23 US dollars. But the upbeat did not last long. The US dollar began to fall prior to the meeting of the financial ministers of the G7 countries. As expected, although the statement issued at the meeting warned that an undue fluctuation and inordinate changes are not favorable to the economic growth, there was no concrete measures and the United States' stance was also a platitude with no fresh idea at all.
In fact, the devaluation pressure on the US dollar can not be solved only by the exchange rate. Many experts estimated that even though the US Federal Reserve raises the exchange rate, the US dollar may not stop falling nor rise, and moreover, the scope of the exchange rate to be adjusted by the US Federal Reserve is very limited. The US dollar is still facing a downward slope. The latest report by Golden Sachs analyzed that problems in nowadays cannot be solved by way of traditional economic means. Interest rate, if reduced, cannot but spur more loans and more consumption whereas, if lifted, will force enterprises to reduce loans, which is the same as to undermine the economy just awakened. Only a sluggish US dollar is able to play a role that the raising or reducing the interest rate is unable to work.
Inside US: devaluation of US dollar intends to kill two birds with one stone
For the United States itself, the benefit the devaluation effectuates is more beneficial rather than unfavorable. The amount the US people spent last year was US$ 500-billion-odd more than the wealth they created and the US import was US$ 374 billion more than the export. Like in a family, one has to borrow whenever unable to make both ends meet. The United States needs foreign investors to put in US$ 2 billion for every business day. On the one hand, both fiscal and export are in the red and on the other, there sees a historical low saving rate ever since World War II. Housing prices stay high and the government is seriously in debt with the US people under the burden of loans. So, there is only one way out, i.e. for the US dollar to depreciate. The US dollar, if devalued, can not only ease the burden of foreign loans but also boost the competitiveness of the United States in export, thus killing two birds with one stone. As expert with the Institute of International Economics in Washington estimated, the US dollar should again depreciate by 15-20 percent to cut off half of the deficit from the international balance.
In almost one year in the past, the devaluation of the US dollar did not effect an obvious stimulation on the inflation. The US consumer price index rose only by 1.1 percent in the past 12 months. Though the US dollar depreciated, the price of imported goods in the US market did not rise very much. During recent years, the US enterprises flocked overseas for production. With the cost on labor reduced and the pressure of price removed, many imported products therefore became much cheaper.
Outside US: hesitating to pelt the rat?- incompetent to interfere
Globally, it has not been able to bring about a strong resurgence of the world economy, and cannot but depend more on the US economy. Export-oriented countries have to bear more and more the pressures incurred by the devaluation of the US dollar. For instance, in order to prop up Yen (Japan's currency), Japan bought in some US$ 220 billion. Japan's foreign exchange reserve has reached about US$ 700 billion, most of which was bonds issued by the US government. Once the US dollar depreciated, the bonds in US dollar would drop. So Japan does not want the US dollar to depreciate.
Since Japan bought in a great amount of US dollars to block the rise of Yen, the impact effected on the Euro by the drop of the US dollar was more conspicuous. Europe was waddling along in recovering its economy, and now export is affected with the appreciation of the currency. Last year, the exchange rate of Euro to US dollar rose by 22 percent. Countries such as France and Germany made a lot of complaints. However the problem facing the European Union (EU) is not whether to interfere or not but whether there can be any unanimity for the interference. Although the European Central Bank has the responsibility to control the circulation of Euro, EU Council for Economic and Financial Affairs (ECOFIN) composed of financial ministers of member countries has the power to determine the orientation of the policy on the exchange rate. Under certain special situation, interference can be practiced only after the financial ministers put their heads together with EU Commission. Countries in the Euro Zone have their own difficulties therefore, it?¡¥s hard for them to agree on one another in terms of their own interests.
In the final analysis, both Europe and Japan have the means to interfere in the market only on the basis of consultation with the United States. Without the support of the United States, interference is likely to fail and incur severe fluctuation in the market. Because, what exchange rate policy is going to take depends finally on whether it is able to motivate the development of the US economy. Once the US economy, the flagship of the world economy, becomes sluggish, there will be no benefit for anyone. If there is a sharp drop of the US dollar entailed due to the short of coordination, the result will be a total failure.
Up to now, the US dollar has been gradually sliding down with little ripples. This is generally in line with what the Bush administration expected and did not bring about turbulence in the international market. The year of 2004 is the year for presidential election in the United States. Devaluation of the US dollar has brought about much benefit so Bush administration will certainly maintain the current policy on exchange rate. The US Treasury Secretary John W. Snow's remarks before and after the meeting of financial ministers of G7 countries also indicated that the United States is not likely to adjust the current policy. Additionally, it is impossible for the structural problem in the global trade system to be eased soon. Therefore, it is hard to reverse the tendency in which the US dollar can be made to fall in a short time.