Feldstein: Fears About Declining Dollar Exaggerated

Tuesday, 02 Mar 2010 08:58 AM

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There is much to worry about regarding the future of the U.S. dollar, but “the bottom line is that these fears are exaggerated,” writes former Reagan White House economist Martin Feldstein.

In his weekly syndicated column, Feldstein, currently at economist at Harvard University, said that there have been some negative developments of late.

“Let’s start with the most likely of the negative developments: a falling exchange rate relative to other currencies,” writes Feldstein.

“Even after the dollar’s recent rally relative to the euro, the trade-weighted value of the dollar is now 15 percent lower against a broad basket of major currencies than it was a decade ago, and 30 percent lower than it was 25 years ago.”

Feldstein notes that the fear about the dollar’s future is driven by several different, but related, concerns.

Will the value of the dollar continue its long-term downward trend relative to other currencies? Will the enormous rise of U.S. government debt that is projected for the next decade and beyond lead to inflation?

“Although occasional bouts of nervousness in global financial markets cause the dollar to rise, I expect that the dollar will continue to fall relative to the euro, the Japanese yen, and even the Chinese yuan,” writes Feldstein. “That decline in the dollar exchange rate is necessary to shrink the very large trade deficit that the U.S. has with the rest of the world.”

Worries over the fate of the dollar are being driven by the Chinese, primarily. “If the Chinese now hold $1 trillion in their official portfolios, a 10 percent rise in the yuan-dollar exchange rate would lower the yuan value of those holdings by 10 percent,” writes Feldstein. “That is a big accounting loss.”

Not everyone is worried about the declining dollar, however.

Holders of other currencies are finding that oil is less expensive now if purchased in currencies other than dollars, a report in The Wall Street Journal indicated.

© 2014 Moneynews. All rights reserved.

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