The Dollar Does Not Deserve Such a Pessimistic Outlook
Letter to the Editor

Sir, Krishna Guha's article on the US dollar ("Down but not out", Analysis, October 19) provides an excellent account of the US economy's present external weaknesses.

However, he would seem to paint too pessimistic a long-term outlook for the US dollar by not focusing on the basic fact that, for there to be a major further US dollar depreciation, the dollar would need to depreciate substantially against the euro and the yen. Had he focused on that issue, he might have asked whether either the eurozone or the Japanese economies can really tolerate a further significant appreciation of their currencies.

The present global economic crisis has revealed deep tensions between the eurozone's northern members on the one hand and its Mediterranean members and Ireland on the other. One would think that a further substantial strengthening of the euro would raise basic questions in the market about the euro's long-term viability in its present form--for doubts would increase about the ability of countries such as Spain and Ireland to deal with their deep recessions, the continued bursting of their housing market bubbles, and their highly eroded public finances within the constraint of an appreciating fixed currency euro-straitjacket.

Similarly, one would think that a further significant appreciation of the yen would materially exacerbate Japan's already serious deflation problem.

It would also further complicate the handling of Japan's public finances which, judged by the country's public debt to gross domestic product ratio, is already materially worse than that in the US.

Desmond Lachman is a resident fellow at AEI.

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About the Author

 

Desmond
Lachman
  • Desmond Lachman joined AEI after serving as a managing director and chief emerging market economic strategist at Salomon Smith Barney. He previously served as deputy director in the International Monetary Fund's (IMF) Policy Development and Review Department and was active in staff formulation of IMF policies. Mr. Lachman has written extensively on the global economic crisis, the U.S. housing market bust, the U.S. dollar, and the strains in the euro area. At AEI, Mr. Lachman is focused on the global macroeconomy, global currency issues, and the multilateral lending agencies.
  • Phone: 202-862-5844
    Email: dlachman@aei.org
  • Assistant Info

    Name: Emma Bennett
    Phone: 202.862.5862
    Email: emma.bennett@aei.org

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