Greenback's Weakness Poses Threat to US Economy
-- September 19, 2003

The dollar dropped to a two-year low against the yen today after a spokesman for the Group of Seven leading industrial nations said it will urge countries to let market forces determine currency rates (the G-7 consists of the US, Japan, Germany, UK, France, Italy, and Canada). Some analysts believe the Japanese government will be more willing to let the yen rise than it has been in recent months. And that means there is more room for the dollar to fall.

And the dollar isn't just weakening against the yen. After rallying for much of the summer versus the euro, the greenback has resumed its decline. Over the past year, the dollar has dropped more than 13% against its European counterpart. A declining dollar hurts the US in several ways:

First, by increasing import prices in dollar terms, a falling dollar sows the seeds of inflation. Second, a dropping dollar discourages foreign investment in the US by making foreigners' US holdings worth less in their home currency. The US needs huge inflows of foreign capital to finance the exploding trade and budget deficits. The trade gap alone requires foreigners to provide close to $1.5 billion a day.

And foreign investors purchase many of the Treasury bonds that finance the budget gap. In July, they bought a net $44.7 billion of these bonds. If the weaker dollar makes foreign investors shy away from US markets, the economy will be in real trouble.