The controversy surrounding the somewhat weakened dollar is a shame at this point in the global business cycle. First of all, the idea that weakening the dollar will help us achieve short-term “economic” gains is foolish. That has been the long-standing policy of the International Monetary Fund when it deals with poorer nations. It has been shown to be a flawed policy there, so it should not be an accepted policy at home.
The dollar had a strong rise against the major world currencies at the end of 1996 through 2001. This was most likely due to economic growth in the U.S. gaining momentum, along with strong productivity gains and a strong financial market that was the envy of the world. Everyone wanted a piece of this growth, demanding more and more of our dollars. But that was yesterday and we have slowed from those high unsustainable growth rates.
With U.S. growth now increasing at an approximate 2 percent rate (as we slowly absorb our excess capacity), and productivity showing a very healthy recent gain of 2.5 percent, the U.S. dollar should still hold decent levels against our trading partners. Why? As I stated in my March 7 article, “Tough Time Tactics,” the growth rate of gross domestic product in the U.S. is still higher than most of the rest of the world — and that should hold for the remainder of this year and in 2004.
Our productivity gains should also continue to do well with American ingenuity and flexibility intact.
So, with the U.S. dollar recently corrected from a spike, it is now in more of a pro-growth mode. It is as strong as our economy — an economy that is doing well, and certainly much better than most other countries — and it is as strong as our rhetoric, which includes our pro-growth beliefs and policies. However, we had better be careful of our political rhetoric, which could seriously rock our recovery prospects and play into the hands of the speculators.
Steady at the helm. Do not short the U.S. dollar. The U.S. economy is doing just fine.
— Patricia A. Small is a partner with KCM Investment Advisors, and is the former Treasurer, University of California.