Neither Washington nor Wall Street is losing much sleep yet over the dollar as it slips close to all-time lows. But perhaps they should be. The dollar has shed some 8 percent against major currencies this year, and if the decline quickens, it could provoke protectionism from America's trade partners, worsen inflation at home and spark a general loss of confidence in US assets.
That would all make it much more difficult to finance the country's huge deficits, and could threaten to send the US economy into another recession. In fact the burgeoning national debt is where all the negatives for the dollar converge, with America's prized AAA credit rating under threat and large corporations like Caterpillar urging Washington to get its act together.
"There's no sign of panic yet. But the situation can change on a dime," said Brown Brothers Harriman strategist Lena Komileva. If the US economy weakens and US lawmakers fail to find a way to slash a yawning budget deficit, "that could create a run on the dollar."
US policymakers, including Treasury Secretary Timothy Geithner and Federal Reserve Chairman Ben Bernanke, insist they want a strong dollar, but investors say their actions suggest otherwise. The Fed has held interest rates at zero since late 2008, in contrast to other central banks that have begun raising rates to fend off inflation.
That's been an invitation for investors to borrow dollars at virtually no cost and swap them for higher-yielding currencies and assets such as oil and equities. Gold and silver have hit record highs and the euro is hovering near $1.50, about 10 cents from its all-time peak hit in 2008. Standard & Poor's put another chink in the dollar's armor this month when it warned it could cut the United States' credit rating if lawmakers don't find a way to slash a massive federal budget deficit within two years.
Corporate America is voicing its concerns as well. The chief executive of Caterpillar Inc on Friday called for a resolution to the long-running budget battle, saying that finding a way to strengthen the economy would help control the nation's rising deficit and improve long-term competitiveness. Bernanke argues that the US economy remains too fragile for tighter policy and suggested the Fed's pro-growth measures will help the dollar down the road.
"If we do what's needed to pursue our dual mandate for price stability (and) maximum employment, that will also generate fundamentals that will help the dollar in the medium term," he said at a press briefing this week. Adnan Akant, who helps manage about $20 billion in currency assets for Fischer Francis Trees & Watts, a New York unit of BNP Paribas, put it this way: "You don't get a strong dollar by raising rates. You get it by having low inflation and a stronger economy that requires you to raise rates."
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