What's Behind the Dollar's Autumn Swoon

The U.S. dollar's value continues to weaken against the euro and the British pound. To find out why the U.S. currency is losing value, Robert Siegel talks with Fred Bergsten of the Peterson Institute for International Economics.

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ROBERT SIEGEL, host:

If people are thinking of changing the size of U.S. currency to make the bills feel different to a blind person, they might also try a symbolic downsizing. That would reflect the shrinking value of the dollar against other currencies. While the dollar gained a little ground today, one Euro is now worth more than $1.30. That is a gain for the Euro of nearly 11 percent over the past year. So why is the dollar losing value and who are the winners and losers when the dollar falls?

We put those questions to Fred Bergsten of the Peterson Institute for International Economics, beginning with why is this happening.

Dr. FRED BERGSTEN (Peterson Institute for International Economics): It's happening because the United States is running a massive trade deficit, reaching almost $1 trillion a year. That's an indicator that the U.S. is not fully competitive in global trading markets, and that in turn means that the dollar is overvalued in terms of other currency.

We actually need a cheaper dollar. It will make our exports more competitive, it'll make imports cost a little more so we'll buy fewer of them and it'll correct what is one of the biggest imbalances in our whole economic picture.

Well, on the most micro of micro levels, Americans on tight budgets should travel to Europe only at their peril at this point, when the dollar is weak against the Euro, but on a bigger scale, I assume this must hurt Europeans who are hoping to sell things to Americans.

Dr. BERGSTEN: Europeans are unhappy about the rise in the value of their currency. On the other hand, it has risen from a level that was very low, acknowledged to be too low in Europe itself, and may have to rise further as part of this overall correction.

One of the big problems is that the Asian countries, particularly China, have been unwilling to let their currencies go up against the dollar any or very much, meaning that all of the counterpart rise against the dollar has gone to the Europeans. So that's a justifiable complaint by them, and one needs to lean on China and the Asians to let their currencies go up as part of this overall correction.

SIEGEL: Apart from, say, Americans who own resorts that cater to the European tourist trade, who would have lots of Europeans coming over to take advantage of the cheap dollar, who else in the United States would gain from having a falling dollar?

Dr. BERGSTEN: Well, all U.S. exporters gain, so airplanes, Caterpillar tractors, capital equipment, high tech goods from Silicon Valley, services like banking services, lawyers, consultant fees - all those things that we export in very large amounts, $1.5 trillion to $2 trillion a year worth, all those things become more competitive, will sell better in foreign markets, will create jobs here.

SIEGEL: Is there some level of the dollar, some level of its descent that in your mind would go beyond a correction of imbalances and start raising red flags for you and say this is a serious problem if it gets to that level?

Dr. BERGSTEN: Oh, sure. The dollar could get too weak, just as it's been too strong.

SIEGEL: But what is too weak? How much is too weak?

Dr. BERGSTEN: Well, it depends on your judgment as to what level of the trade deficit is desirable or acceptable or sustainable. My judgment is that we need at least to cut the trade deficit in half from where it is now, take it down by, say, $400 billion to $500 billion a year.

So what's really needed is a very large decline, 30 percent or more against some of the Asians, and maybe some continued but much more modest decline against the Europeans and the Canadians and other major trading partners of the United States.

SIEGEL: Fred Bergsten, thank you very much for talking with us.

Dr. BERGSTEN: Glad to do it.

SIEGEL: That's Dr. C. Fred Bergsten of the Peterson Institute for International Economics.

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