> Financial Times; Aug 13, 2001
> Given the poor state of the US economy, the dollar's strength remains
> pretty remarkable. The dollar is up by almost 40 per cent on a
> trade-weighted basis since its ascent began in 1995. A 2 per cent fall in
> the last month, against that backdrop, is modest indeed. Traditional
> approaches suggest the dollar is considerably overvalued. Purchasing power
> parity models suggest that Euros 1 should buy at least Dollars 1.05,
> rather than less than 90 cents.
> There are some signs that the dollar has turned - though there have been
> plenty of false dusks before now. The dollar may have shrugged off the US
> slowdown, but wider acceptance that the economy will not snap back as
> quickly as hoped could lead to a far sharper decline, even with activity
> sluggish elsewhere, while doubts linger over US productivity growth. Over
> time, a dollar correction looks inevitable. The US current account deficit
> at 4.5 per cent of GDP and overseas appetite for US assets - direct
> investment and portfolio flows - finally appear to be moderating, though
> inflows into the US corporate debt market remain very robust. Dollar bulls
> are tacking back their forecasts. Euro bulls could be forgiven for keeping
> quiet given past, painful experience, while the Japanese policy response
> to a strengthening yen is cloaked in uncertainty.
> Goldman Sachs suggests the US Treasury should drop the strong dollar
> policy while demand for US assets remains relatively strong, rather than
> risk a loss of credibility when the dollar depreciation materialises. It
> is certainly the case that, while the dollar helped to keep inflation down
> in recent years, its strength is now counterproductive. The strong dollar
> policy is based on rhetoric rather than policy actions. Jaw-boning is of
> debatable importance, but a formal shift in the policy stance could still
> create more excitement than is necessary. Given that secretaries Rubin and
> Summers both maintained the strong dollar line while taking part in
> intervention to weaken the dollar, it should not be too hard for Paul
> O'Neill to stand by and watch a market-led depreciation without feeling
> the need to hire Yankee Stadium to make an announcement.


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