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The Benefits of a Lower Dollar: How the High Dollar has Hurt U.S. Manufacturing Producers and Why the Dollar Still Needs to Fall Further

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Abstract:

The current decline in the dollar will provide a much-needed stimulus to the U.S. economy. The falling dollar will bring especially welcome relief to the internationally competitive U.S. manufacturing sector, which has suffered disastrous consequences--lost jobs, reduced profits, and decreased investment--as a result of the dollar's over valuation for the past several years. However, although the dollar has come down significantly from its peak in February 2002, it has not yet fallen nearly enough to reverse the damage caused by its high value since the late 1990s.

In spite of its recent fall, the dollar has still not lost most of the value it has gained since 1995 compared to the euro and other major currencies. Moreover, the dollar has not fallen compared to the currencies of the developing nations that now account for more than half of the U.S. trade deficit. Some of these nations, especially China, maintain fixed exchange rates and intervene heavily to prevent the type of market-driven adjustment that is now occurring between the dollar and the euro. As a result, relying on financial markets to bring the dollar down is not enough.

More active management of the dollar's decline--including cooperation with major U.S. trading partners and action to end foreign manipulation of currency values--is vital to ensure that the dollar falls in a comprehensive and sustainable fashion. With the U.S. economy still struggling to recover nearly two years after the recession of 2001 officially ended, with the trade deficit still at record levels, and with global currency markets already forcing a downward adjustment in the U.S. exchange rate, the need to reconsider the U.S. Treasury's "strong dollar policy" has never been more clear.

Although some Bush Administration officials have recently signaled a greater openness to market-driven reductions in the value of the dollar, much more needs to be done by the U.S. government--both alone and in collaboration with U.S. trading partners--to ensure a stable adjustment of the dollar to a more realistic level while promoting a recovery of growth in the global economy.