Falling Dollar May Spark U.S.-Europe Trade War

From the N.Y. Sun:

With the Federal Reserve chairman, Ben Bernanke, planning to maintain low interest rates in an effort to keep the economy out of recession, there is no end in sight for the dollar’s record slide, at least for the remainder of the year.

In congressional testimony before the Joint Economic Committee yesterday, he suggested that growth will be “sluggish” in the first quarter of 2008 and, notwithstanding the risk to inflation, he gave no hint that interest rates will be raised in the short term.

The advantage a cheap dollar provides for American exporters, however, has brought stern warnings from the Chinese, who say they will start to move their reserves out of dollars into harder currencies.

Even President Bush’s new ally, President Sarkozy, bluntly told Congress that the continued weakness of the dollar could prompt a trade war between America and Europe, with the Europeans deliberately reducing the euro’s value to allow European exports to compete with American goods.

Both the European Central Bank, which sets the interest rate for the euro, and the Bank of England governor, who does the same for sterling, yesterday left rates as they were to deter inflation and thereby gave no relief to Mr. Bernanke, who implied that there was little prospect of raising American interest rates in the near future.

As with all things finance related, the “benefits” of a falling dollar can seem a bit arcane to the layman. Basically what it means is that there may be more people in countries with stronger currencies looking to stretch their money by buying our goods on the cheap and we should also see a boom in tourism as Canadians, Europeans and the English will have much more purchasing power than they used to. It is American exporters who will do the best however:

The weak dollar (it has fallen more than 20% on a trade-weighted basis since its peak in 2001) is helping exporters close America’s trade imbalance. America’s current-account deficit fell to 5.5% of GDP in the second quarter, from a peak of 7% at the end of 2005.

If the dollar’s still falling it’s a good time to invest in foreign currency by the way. Europe and much of the world isn’t happy with the decline in the dollar, and what it will possibly presage:

A more sinister warning about the implications of the dollar’s weakness was delivered in person to Congress by Mr. Sarkozy on Wednesday.

“Those who admire the nation that has built the world’s greatest economy and has never ceased trying to persuade the world of the advantages of free trade expect her to be the first to promote fair exchange rates,” he said.

The artificially undervalued Chinese yuan “is already everyone’s problem,” he said. “The dollar cannot remain solely the problem of others. If we’re not careful, monetary disarray could morph into economic war. We would all be its victims.”

Implications of the weakness of the dollar price is likely to be raised by Chancellor Merkel when she visits Mr. Bush at his ranch in Crawford, Texas, this weekend.

Mrs. Merkel is “preoccupied” by turbulence in the financial markets, the German foreign ministry’s coordinator for American relations, Karsten Voigt, told Bloomberg News yesterday. Cooperation between America and Europe on interest rates and currency values “is absolutely necessary,” he said.

The Canadian government also expressed concern about the effect of a weak dollar on world markets, and said the issue would top the agenda of next week’s G20 meetings of finance ministers and central bankers in Cape Town, South Africa.

The devaluation of the dollar is causing Middle East oil exporters, who are paid in dollars, to demand higher prices to compensate for the dollar’s loss of value. The rising price of oil and an expected hike in commodity prices may spark inflation.

It sounds like the Europeans and Canada are worried about what a devalued dollar, (devalued largely by China’s economic warfare and the comintern like propaganda issued by our left leaning MSM) means to world stability as oil becomes to expensive to drive the industrial worlds economies. Should we “cooperate” with other countries to keep the peace even if the cooperation means not doing what’s best for our economy?

And if we don’t are things are things on the world market bad enough for a trade war to escalate?

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