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February 23, 2001

Watch Out, U.S. Dollar

The strong dollar policy is dying a slow death, the stock market is cratering, and stagflation is fast approaching. Foreign investors should be very afraid.

Treasury Secretary Paul O'Neill, in an interview with a German magazine, said last week, "We are not pursuing, as it is often said, a policy of a strong dollar. In my opinion, a strong dollar is the result of a strong economy." And though he has tried to backpedal on his statement, you can be sure that foreign investors are now watching the Bush Administration's moves very carefully.

That's because, it's fairly obvious that the U.S. economy is creaking to a halt. Business and consumer demand has slowed, companies regularly issue disappointing earnings reports or warn of future disappointments, layoffs have climbed to the hundreds of thousands, and the outlook for improvement is cloudy at best.

The only thing stopping foreign investors from fleeing to other markets is the belief, reinforced by 10 years of good times, that "the dollar will always be strong. But, now, the good times are gone. And given the poor prospects of the U.S. economy for this year, it's hard to believe that foreign investors would rather prop up the U.S. currency rather than their own.

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