Be Careful on the Dollar

A weak dollar might not be as good as the White House seems to think.

October 17, 2003
By Justin Lahart, CNN/Money Senior Writer

NEW YORK (CNN/Money) - President Bush touched down in Japan Friday, kicking off a six-day tour of Asia and Australia.

He's expected to fight hard for market-driven currency regimes -- a not-so secret code for a weaker dollar. Already Asian countries are fighting back. An analyst at the Asia-Pacific Economic Cooperation group, whose forum Bush will attend over the weekend, said Friday that one of the biggest threats to growth in the region is a sharp decline in the dollar.

He may have a point worth heeding, noted HSBC currency strategist Marc Chandler. Asian markets are much less developed than their U.S. counterparts, which means they are much more prone to shocks from hedge funds piling in and out. Just think back on the damage that got done to Asian economies during the Thai bhat crisis of 1997 and the Long Term Capital Management meltdown in 1998.

Since their economies can be hurt so badly by such hot money, Asian central banks may have some justification in protecting their currencies. What's happening now is a case-in-point. Almost $60 billion in foreign money has poured into Japan's stock market alone since April.

Nor could the U.S. economy, which though improving is nowhere close to full-fledged recovery, afford to see Asia knuckle under again. For the U.S. economy to really hum again, the rest of the world needs to be humming along besides it.

It's also worth pointing out that a decline in the dollar would do little to help the United States' big trade deficit by, say, election day. In fact, a little economic theorem called the J-curve says that the trade deficit would actually get worse, because higher prices on imports will more than make up for reduced volumes.  

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