Economists should get rid of the terms ‘strong’ and ‘weak’ when discussing the dollar’s value, and use words like ‘heavy’ and ‘light’ instead. It would do wonders to change the American public’s perception that somehow a strong dollar must always be good.Well, PIMCO’s global portfolio manager Scott Mather makes a pretty complete and concise argument why investors, and Americans, should not to fear a weak dollar. This is because a steadily declining dollar actually helps solve global imbalances which could cause the next U.S. crisis.
PIMCO: Attempts to prevent a continued orderly dollar decline may further perpetuate global imbalances, slow U.S. economic recovery and prevent a stabilisation in the U.S. debt dynamic that is badly needed.
His key ponts:
The dollar isn’t even that weak. You can’t just look at the dollar vs. a single currency. Using a broad measure of dollar value, the dollar is still stronger than it was back in 1979:
A better measure is the Real Broad Traded Weighted Exchange Rate. This type of currency measure is constructed to look at the value of a basket of currencies weighted by their respective importance in trade and adjusted for inflation differentials (see Chart 1).
[image url="http://static.businessinsider.com/image/4b1f58f600000000004f3b74/image.jpg" link="lightbox" caption="" source="" alt="Chart111" align="left" size="xlarge" nocrop="true" clear="true"]
The dollar isn’t about to have a crisis. It’s declining value relative to other currencies will actually help prevent one.
a weaker dollar is one of the least painful ways to both stimulate the U.S. economy and rebalance the global economy. It is only the fear of turning what has so far been an orderly decline in the U.S. dollar into a more tumultuous decline that is preventing a more honest and open policy dialogue. But surely the benefits of a weaker U.S. dollar are not lost on the U.S. Treasury or the Federal Reserve.
Blindly supporting a strong dollar hurts the U.S.. Thus arguing for a strong dollar is to prolong America’s economic problems:
Arguments for a renewed commitment to a strong U.S. dollar are equivalent to suggesting that the imbalances that helped bring about the economic crisis should be further encouraged and that U.S. indebtedness should continue to expand. This would further promote an economy based on consumption and unsustainable indebtedness rather than one balanced with an appropriate amount of production and saving.
Look around the world. Shouldn’t it strike strong dollar advocates as funny that most major economies are trying to weaken their currencies vs. the dollar?
Why it is that virtually no other country in the world is promoting strength in their own domestic currencies, if it’s such a good thing for economic growth? In fact, many countries are openly intervening in the currency markets to try to prevent or slow the appreciation of their currencies vs. the U.S. dollar. If a strong currency is so good for the U.S., why isn’t a strong domestic currency a desirable policy objective for every other country in the world?
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