Economy Good, but Dollar Raises Red Flags
Thursday, January 08, 2004
WASHINGTON — Positive economic data has prompted many experts to paint a rosy scenario for the U.S. economy, but bad news persists amid the good news: The American dollar is wilting.
Gross domestic product (search), consumer spending and retail sales have all increased. The stock market is up, interest rates are down and unemployment is falling.The news has given the Bush administration something to crow about.
"These recent ecouraging signs suggest a sustainable economic recovery, rebuilding on a robust third quarter which saw real GDP growth of 8.2 percent, the best in nearly 20 years," Treasury Secretary John Snow (search) said Wednesday.
Over the past two months, however, the U.S. dollar has fallen 10 percent against the Euro to about 80 percent of the Euro's value. It is worth about half the value of a British pound. Most analysts expect it to plummet further in the days ahead, remaining weak for the rest of this year.
"We think the Euro is on its way to $1.35 by the middle of the year and we think the dollar/yen is going to be breaking below $1.00 again by the middle of the year," said Marc Chandler, a currency strategist for HSBC (search). Other analysts also say the dollar should hit its low in about six months.
A weak dollar means American exports are cheaper abroad and foreign goods are more expensive in the United States. Those conditions make the trade deficit (search) grow.
Experts say the weakened dollar is the fault of increased U.S. deficit spending, financed largely through foreign loans.
"Foreigners don't want to lend us as much money as we want to borrow from them unless they get a better deal in getting more dollars for their own currency. It's as simple as that," said William Niskanen, a former economic adviser to President Reagan.
The International Monetary Fund (search) released a report Wednesday raising concern about growing U.S. deficits. In the 2003 budget year, the deficit rose to $374 billion, the largest dollar amount in history. The Congressional Budget Office (search) and Office of Management and Budget (search) both predict the deficit will rise to $500 billion in 2004.
"The magnitude of the current ... deficit is very large and the ... liabilities of the United States are rising quite rapidly," reads the report "U.S. Fiscal Policies and Priorities for Long-Run Sustainability," written by IMF official Charles Collyns. "This is a problem which, if not addressed, could create ... disorderly conditions in exchange markets."
The IMF is, in effect, nagging the Bush administration about its spending.
"I think in this case the nagging is appropriate. Our federal deficit is much too large to be sustained and to contribute to a global world economic order," Niskanen said.
The Bush administration blames deficit spending on a confluence of events, including a cyclical downturn in the economy, the war on terrorism and corporate malfeasance. Democrats blame the deficit on tax cuts pushed by Bush.
With a 10-year, $400 billion Medicare drug coverage plan approved by Congress, spending is expected to increase dramatically, which experts say will drive the deficit further into the red.
"If the federal government is going to increase tax cuts, they cannot also go on a domestic spending spree without plunging the nation into deficits," said Brian Riedl, a budget analyst at the Heritage Foundation.
The Bush administration acknowledges that it must bring down its deficit spending, and Snow predicted that the deficit would be cut to 2 percent of GDP, from its current 4.5 percent, in the 2005 fiscal year budget. That's still too high, says the IMF, given the looming retirement of baby boomers and their demands for government benefits.
Snow said the Bush administration has a "strong dollar" policy that it sees as vital to U.S. interests, but combined with the low U.S. interest rates, and apparently limited concern about balancing the budget, a rebound of the dollar appears unlikely.
Snow said Bush will spell out in greater detail how his administration intends to bring deficits down during his State of the Union address later this month.
Fox News' Brian Wilson and Peter Brownfeld contributed to this report.
URL:http://www.foxnews.com/story/0,2933,107795,00.html |
