Global risks from surging dollar
16 February 2002
NEW YORK: The Conference Board, a top US research institute, said on Friday the US dollar should continue to strengthen against the euro and yen in 2002, spurring further US productivity gains but blocking investment flows to the rest of the world.
"The continued rise of the dollar is a very loud signal that the global market system needs work," Gail Fosler, chief economist of the private, New York-based group, said in a news release.
The institute forecast the euro will tumble to an all-time low of 84 cents by year's end, compared with 87.33 cents on Friday morning, and that the yen will slide to 142 per dollar from 132.76 yen on Friday.
Fosler said the strong dollar, by making foreign goods cheaper in the United States, would force US companies to continue to adopt new technologies to ensure they remain competitive in global markets.
"The impact of these powerful technologies more than offsets dollar strength, setting the stage for a major rebound in corporate profits in 2002-2003," she said.
That, in turn, should ensure that the United States remains the top destination for global investment, with capital inflows only helping to drive the dollar still higher.
While that may be good news for the United States, the Conference Board said the dollar's pre-eminence in world currency markets was causing global distortions.
"It tends to distort or put out of line the allocation of capital around the globe," said Ken Goldstein, a Conference Board economist.
That should put upward pressure on interest rates outside of the United States, the institute said, and because 60 percent of world trade is denominated in dollars, the robust dollar "substantially diminishes the international purchasing power of most currencies." Reuters
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