stronger U.S. dollar could undermine U.S. recovery
The recent surge of the U.S. dollar against other major currencies - most notably the euro due to Greece’s financial woes - could potentially be severely damaging to the American economy.
The strengthening of the dollar is obviously not accompanied by a strenghtening of the overall economy. Unemployment is still at 9.7%, President Obama just recently proposed his $ 3.8 trillion budget resulting in the largest budget deficit in U.S. history and there are still several unsolved problems out there like the weak housing market, out-of-hand private debt and rising credit card defaults. In addition, the next financial time bomb (ranging from Dubai times 10 to Dubai times 1000 (if the Chinese housing bubble were to burst)) might just be around the corner.
While America is indeed gradually recovering, it still has no concept of how to find a new foundation for growth in the post-depression world. Financial services can’t be expected to contribute as much to growth as they had done before the crisis. The U.S. industrial base won’t be able to fill the gap. The necessity for grand-scale structural reforms are hard to deny. In my opinion, the best bet for the future would be the clean power technology sector. But in order to get the energy technology revolution going, it will take significant investments by private companies and venture capitalists, rising oil prices or a set of government incentives and disincentives that would support the creation of a new powerful industry in the U.S. and make these new technologies competitive by forcing up prices for conventional dirty fuels which are jeopardizing both, national security and climate stability.
In this difficult economic environment, a strong dollar is anything but a blessing. The European export-oriented companies in the automobile industry, the energy sector or the health care sector managed to be competitive with their American counterparts when it took more than $1.5 to buy one euro. Now with one euro only costing around $1.36, many European businesses find it pretty easy to steal market share from their U.S. competitors.
Exports are crucial to the picking-up growth of the U.S. economy; exporters are major job creators. As American domestic demand will take years to recover, American corporations are seeking to meet foreign consumers’ demand. President Obama is determined to double exports over the next 5 years and thereby create 2 million additional jobs. But with a strong dollar making American products and services more expensive abroad and imports cheaper for American consumers, the foreign trade deficit is more likely to grow than to shrink.
The destabilizing consequences of America’s habit to spend more money on products it imports than it is making by selling products to foreign consumers are becoming more and more obvious. While the U.S. already ows mind-boggling sums to China and oil exporting countries, it also increases its reliance on these countries to finance its budget deficit.
On the one hand, a stronger dollar would help to prolong the willingness of the Chinese to continue buying U.S. treasury bonds, but on the other hand, a reduced reliance on foreign lenders through more fiscal discipline and more balanced foreign trade would undoubtedly be more sustainable in the medium and long term.
Another consequence of a stronger dollar usually are lower oil prices. What at first sight might be beneficial to consumers and businesses alike, lessens the pressure on the U.S. to reduce its dependence on foreign oil and instead, produce more energy domestically and create millions of local jobs by harnessing domestic energy sources such as the sun, wind and the tremendous energy saving potential.
Finally I want to share my view on the crisis in the eurozone. While it is true that several European economies such as Greece, Spain, Italy and Portugal have been living beyond their means since they were able to borrow in euros - and Greece even had to cook the books to be admitted to the eurozone - I don’t see the 16-nation bloc breaking up. Wealthier member states such as France and Germany do have a strong interest in the stability and integrity of the eurozone because a significant share of their exports stays within the single currency market. Besides, inaction by the larger members in the event of a default of a fellow eurozone member state would likely trigger panic on financial markets, harm other eurozone members that otherwise were able to take care of themselves if credit markets stayed calm and the bottom line were that the refusal to support a single state would lead to the necessity to bail out half a dozen states to avert a meltdown. Last but not least, Greece could still turn to the IMF as a measure of last resort - even though France and Germany oppose outside interference, partly for political reasons (the IMF’s director Dominique Strauss-Kahn could be a competitor for France’s President Sarkozy in the next election).
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http://www.google.com/hostednews/ap/article/ALeqM5iZnfNIDibBZ2lgBu_KVRX_wauO2AD9DQNFFG1
http://www.finance-weblog.com/50226711/strong_dollar_good_weak_dollar_bad.php
http://www.buzzle.com/articles/obama-budget-sets-records-highest-ever-budget-deficit.html
