U.S. Trade Deficit

SvD:s förklaring


U.S. economist Fred Bergsten said he expected the dollar to fall sharply in 1999, with structural, systemic and cyclical considerations all pointing in that direction. In a paper to be presented at the World Economic Forum's annual meeting here on Friday 99-01-29, Bergsten said:

"One of the major global economic events of 1999 is likely to be a sharp decline in the exchange rate of the dollar."

He said fundamental equilibrium rates, calculated by the Institute for International Economics which Bergsten heads, suggested an equilibrium rate of about one euro to between $1.25 and $1.30.

The euro at midday in Europe on Thursday was at $1.1422/1425.

The same fundamentals suggested a rate of 1 dollar to 100 yen. That compared with 115.55/60 yen today.

But because market rates typically overshoot, "the dollar could depreciate well beyond these levels in its initial fall," he said.

Any such move would likely hurt both Japan's growth and increase unemployment in Europe. A dollar drop could also eventually push U.S. interest rates higher just when the economy appeared to be slowing down.

The implications could include slower growth in major countries, and increased need for the Group of Three (euro zone, Japan and the United States) to manage their exchange rates more actively, said Bergsten, a former White House adviser.

"The best approach, as proposed by the new German government and supported by Japan and other continental European members of the G7, would be installation of a regime of 'controlled flexibility'," Bergsten said.

This could call for, among other things, joint intervention, further European interest-rate cuts, and perhaps fiscal expansion in the United States.

Bergsten's calls reflected similar sentiment among proponents in some major countries. However Germany, for example, has stopped short of calling for fixed targets. Those who oppose such targeting believe it could lead to problems in that it would put more pressure on countries' internal fiscal structures, denying them access to exchange Bergsten cited at least four main reasons for his outlook.

For one, he said the U.S. current account deficit was likely to rise to about $300 billion, equal to roughly 3.5 percent of gross domestic product. This was roughly the same level reached at the previous peak in the mid-1980s "after which the dollar fell by over 50 percent against both the mark and yen."

He said at the same time, Japan and Europe had built up large creditor positions. He expected the rise in the U.S. current account deficit to intensify "a wide range of protectionist trade pressures" in the country.

"Market attention to the external deficit will escalate sharply as a result. Previous U.S. efforts to reduce its deficits via dollar depreciation will be recalled. This series of events will add to the prospect of a sizable dollar fall," Bergsten said.

He said the creation of the new single European currency could add to pressure on the dollar by leading to portfolio diversification out of dollars. And he expected the U.S. economy to slow sharply in 1999.

Any drop in U.S. interest rates relative to European rates could reduce the differential currently favoring the dollar.

"Any recovery in Japan would probably produce higher rates there and add to the reduction in trans-Pacific yield differentials as well," Bergsten said.

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