10.12.2009

The Dollar and Damaging Distractions

Assessing the dollar within the standard "weak" versus "strong" paradigm makes the dollar look weaker than ever at the moment.  While American exports may look more attractive as a result, one must wonder what ultimately occurs when the currency loses global relevance, as it seems to be happening in a tangible way - foreign central banks are diversifying out of the dollar:

Nations reporting currency breakdowns put 63 percent of the new cash into euros and yen in April, May and June, the latest Barclays Capital data show. That’s the highest percentage in any quarter with more than an $80 billion increase.

And why are they doing it?

America’s currency has been under siege as the Treasury sells a record amount of debt to finance a budget deficit that totaled $1.4 trillion in fiscal 2009 ended Sept. 30.

President George W. Bush did little to strengthen the dollar, seeking to make American exports more attractive internationally.  President Obama, according to the Bloomberg piece, seems content to do the same.  But our more precarious fiscal position and our ever-ballooning debt has rightly raised questions about the underlying sustainability and health of the currency - which was arguably a rather rickety reserve currency going into the crisis.  I don't blame other nations for diversifying:

Foreign companies and officials are starting to say their economies are getting hurt because of the dollar’s weakness.

President Obama, with all his good intentions, needs to realize that printing our way out of the crisis will have consequences.  It's fundamentally irresponsible - and foreign central banks are beginning to act in earnest on that simple factual observation.

As with a number of other problems on the menu, I blame the administration's failure to attend to this problem in a serious way on its insistence on passing healthcare reform.  The debate, one Obama created himself in the midst of the economic downturn, is mistimed at the very least.  At worst, it has prevented the President and his team from focusing on creative solutions for truly pressing problems like: 1) the Too Big to Fail quandary, 2) the War in Afghanistan, 3) the ongoing rise in joblessness, and, 4) as we've seen lately, the ongoing recovery in New Orleans.

ADDED:  More from an (admittedly vaguely populist sounding) opponent of the weak dollar.