The dollar falls, and Treasury stands aside

Currency is down 22 percent since January of 2002. White House insists there has been 'no change' in policy.

The dollar, which has already fallen 8 percent in two months, is likely to drop even more. The move may help the US economy by boosting exports, allowing American companies to book more orders for everything from aircraft to bulldozers.

Yet it will likely hurt the already fragile European economy. It will make it more difficult for overseas firms to sell goods here and further curtail US tourism abroad.

At the same time, the move could rattle the US financial system. With a trade deficit of about $42 billion per month, the US has to attract foreign capital to finance the yawing gap. Much of the foreign money that comes in gets invested in US stocks and bonds.

"What a weaker dollar means is we must give up more goods and services to get the same from the rest of the world. It makes us less well-off," says Paul Kasriel an economist at the Northern Trust Company in Chicago. "Our standard of living will go down."

But the news of an apparent shift in American dollar policy was welcomed by John Williamson, an economist at the Institute for International Economics in Washington. A "more realistic value for the dollar," says, would be good for the United States economy, boosting exports and discouraging imports.

"A collapse of the dollar would be a disaster," says Clyde Prestowitz, head of the Economic Strategy Institute in Washington. Much better would be a "slow and gradual slide" into a "more realistic equilibrium" with currencies of other countries. If history is any guide, the dollar will "overshoot in its fall," says Williamson. "I don't have any great faith in our ability to control it."

Mr. Prestowitz suspects that one element in the dollar's decline has been the jump in the budget deficit in the US. Foreign investors see this as pointing to an even greater need for the US to import capital. Already, he says, the US "has been living beyond its means."

Economics is complicated, the dollar is falling and that affects the economy in both good and bad ways. There is a relationship between interest rates and currencies as well and with the Fed expected to keep rates down for years the dollar has nowhere to go but down. This causes it's own inflation as most low priced products are imported. This is bad news for those with lower incomes. The decline in mass market retail sales is also going to hurt even if companies that produce for export benefit.