https://www.project-syndicate.org/commentary/should-anything-be-done-about-strong-dollar-by-barry-eichengreen-2024-05?utm_source=Project+Syndicate+Newsletter&utm_campaign=439221ac07-sunday_newsletter_05_19_2024&utm_medium=email&utm_term=0_73bad5b7d8-439221ac07-105732865&mc_cid=439221ac07&mc_eid=0064ce538d
BARRY EICHENGREEN, or the Project Syndicate subtitle writer, asks:
The dollar's strength, particularly against major Asian currencies, has triggered a wave of skittishness in financial markets. Can anything be done to stem the greenback's rise, and even if something can be done, should it?
Eichengreen, like Noah Smith, focuses on the sharp fall in the value of the Yen against dollar. That focus is not mine. If the strength of the dollar is a problem for Japan, the solution lies with Japanese macroeconomic policy and I have nothing to contribute there.
The strength of the dollar – no “if” -- _is_ a problem for the US. Better said is a symptom of an underlying problem: the federal deficit. Although the Fed should soon reduce interest rates -- it probably should have done so already -- the level of interest rates that is compatible with a return to target inflation will be substantially higher than before the massive accumulated deficits of the Pandemic years and since. And these interest rates are the financial counterpart of the flow of resources from investment to consumption that deficits mark. It is this flow or resources, lower investment, the slower growth and lower future real income that are the problem.
It is worth noting, however that high-deficit “equilibrium” interest rates make the dollar an even greater attraction for foreign savings and it is that inflow that contributes to the dollar’s strength. And the same strength, making imports cheaper and exports less profitable, is a disincentive for efforts to re-invigorate US manufacturing. That the subsidies being given to encourage domestic manufacturing themselves contribute to self-cancelling deficits is an additional layer of irony.
It is also worth noting that it not the inflow of foreign capital seeking the safety and liquidity of the dollar and benefitting from the efficiency and sophistication of the US international financial infrastructure per se that discourages US manufacturing. It is that the _net_ capital inflow is positive. In better macroeconomic circumstances, federal revenue collection would be higher, national saving and investment would be greater, some of that investment would take the form of foreign investment and the US would be exporting more than it imports.
[Standard bleg: Although my style is know-it-all-ism, I do sometime entertain the thought that, here and there, I might be mistaken on some minor detail. I would welcome comments on these views.]