Dollar at 20-Month Low vs. The Euro

Against the euro, the dollar has fallen about 12 percent since December 2005, but many economists welcome the fall.
Against the euro, the dollar has fallen about 12 percent since December 2005, but many economists welcome the fall. (By Stephen Hilger -- Bloomberg News)
By Peter S. Goodman and Nell Henderson
Washington Post Staff Writers
Wednesday, November 29, 2006

NEW YORK, Nov. 28 -- The U.S. dollar fell to a 20-month low against the euro Tuesday, the latest development in a year-long currency readjustment that could make some imported goods more expensive, but could also help American workers by boosting exports.

Traders are not entirely sure why the currency is falling, but several pointed Tuesday to signs of economic weakness in the United States and strength in Europe. That is fueling expectations that interest rates will rise in Europe relative to the United States, prompting investors to move assets out of dollars.

Many economists welcomed the decline. Despite six trading days of fairly sharp drops, they say, the dollar remains significantly overvalued against other currencies, making U.S.-made goods more expensive on world markets while encouraging imports.

That, combined with the willingness of U.S. consumers to continue spending despite rising debt, has helped to give the United States a trade deficit expected to reach $900 billion by the end of the year, according to the International Monetary Fund.

"The strength of the dollar has contributed to this historically high trade deficit," said William R. Cline, a senior fellow at the Peterson Institute for International Economics in the District. "The dollar needs to fall, and that should be seen as a good sign, not a bad sign."

At the close of trading here Tuesday, one dollar was worth 0.758 euro, a drop of about 12 percent since December 2005. The rapid movement in recent days, though eliciting considerable attention from traders, has amounted to a drop of less than 3 percent. Economists say that is too small by itself to make much of a dent in the trade balance.

Moreover, changes in foreign exchange rates typically take from nine months to two years to be reflected in business and in the price of goods on shelves because orders and investment decisions are made months in advance.

"The movement so far is negligible," said Desmond Lachman, a resident fellow at the American Enterprise Institute in Washington. "That's going to do nothing in terms of adjusting the U.S. balance."

President's Bush's Treasury secretary, Henry M. Paulson Jr., reacted to the decline by speaking Tuesday of his support for a "strong dollar." That is a ritual that Treasury secretaries have followed for years -- they cannot welcome declines for fear of precipitating a rout of the currency. As he said the words, though, Paulson was preparing for a trip to China, during which he plans to press officials there to raise the value of China's currency, and thus lower the value of the dollar. Such a move would boost the U.S. competitive position in global trade.

U.S. manufacturers have complained that China keeps its currency too low on world markets, making Chinese goods artificially cheap and taking jobs from U.S. workers.

"China is the real problem," Lachman said. "That's where the real friction is going to occur."

In recent years, as the U.S. trade deficit has swelled and as fast-growing Asian countries -- not least, China -- have captured a greater share of commerce, economists have grown increasingly fretful about the imbalances imperiling the global economy.

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