Benefits of dollar's rebalancing begin to emerge

Economic Policy Institute

Between 1995 and 2002, the U.S. dollar seemed to be riding a permanent updraft, as its value against other currencies soared. While U.S. consumers enjoyed the lower-priced imports that were one side effect of the superheated dollar, U.S. workers and businesses paid full price as the higher cost of U.S. goods made them harder to sell—here and abroad—and more jobs were threatened or lost. Meanwhile, the nation’s trade deficit exploded, reaching levels that most economists agreed were unsustainable, raising fears of a sudden and catastrophic dollar free-fall.

Now that the dollar’s value has started down the path to more sustainable levels, beginning with the euro and the Canadian dollar, there are some early signs that the trade deficit, too, may be starting to come back to earth. Last week the Bureau of Economic Analysis reported that the nation’s current account deficit, the broadest measure of foreign trade, fell 9% last year, from $811.5 billion in 2006 to $738.6 billion in 2007. This good news is reflected in a steady rise in U.S. exports, which offset the effects of higher fuel prices on U.S. imports.

In two new analyses published today, the Economic Policy Institute’s senior international economist, Robert Scott, parses the latest data and explains why, for further progress on taming our trade debt, all eyes are now turning to Asia. Today’s International Picture shows that the combination of progress on revaluing the dollar and growth abroad has begun to level international playing fields. Today’s Economic Snapshot, which compares the dollar’s value against the currencies of its trading partners, shows that further gains on the trade deficit will depend on convincing Asian nations, especially China, to end policies that are continuing keep the dollar artificially high against their currencies.

Publisher's Note: Soft Landing? Mmmmm. Too early to say and I'm personally not convinced. Stay tuned for more.