In Troubled Economic Times, Yen, Dollar Rise

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ROBERT SIEGEL, host:

As we all know too well, the markets are down, employment is down, real estate is down, lending is down. So you ask, what is up? And the answer is the dollar. That's right, the dollar nowadays is, if not almighty, at least looking mighty strong compared to the euro, the pounds sterling, and many other currencies. But in the current world's strongest currency competition, the dollar takes only a silver. First place is undeniably held by the yen, which is surging in value.

And joining us to help unravel these monetary mysteries is Adam Posen of the Peterson Institute for International Economics. And, Adam, let's start with the dollar. It wasn't that long ago that we thought that anyone who had enough to afford a European vacation couldn't anymore because the euro cost too much to buy. All of a sudden, the euro is collapsing against the dollar. What's going on?

Dr. ADAM POSEN (Deputy Director, Peterson Institute for International Economics): Well, two things are going on. First, the dollar had been over sold. But second and more fundamentally, we're looking at a situation where Western Europe, U.K. are all getting much more of a slow down going ahead for the next couple of years than we are likely to have. And so, people are pulling their money out. The final thing is, when people got spooked over the last few weeks, and the banks in particular had to hold on to cash - cash means dollar assets - so they switched their money into dollars.

SIEGEL: But as we know, in this country, if you buy some investment with a dollar, it's almost guaranteed to lose money right now or, if it's a bond, yield so little in interest that it's hardly worth holding. What's so attractive about this?

Dr. POSEN: But you lose less. I mean, I'm not going to shortcut. You're right. You're losing money no matter what you do. But the question is, how little can you lose? And actually, the U.S. stock markets and in particular the U.S. bonds are down a lot less than other places.

But there's also a risk aspect. Again, you've got people who are getting scared. In particular, a lot of people in Asia who had been putting money abroad and (unintelligible) through places like Iceland, which are not doing so well right now are now, pulling back their money, and they have to pull it out and bring it home or put it in dollars.

SIEGEL: So, as a colleague of mine put it, the U.S. Treasury is now possibly the world's biggest mattress. It's where people are.

Dr. POSEN: It's not comfiest mattress, but it's definitely the biggest.

SIEGEL: OK. Now, the Japanese yen is rising in value even faster. Why? What's so attractive about putting your money in Japanese currency?

Dr. POSEN: Japan has got two things going for it, if you want to put it that way. One is that they are slowing down less than some of the other economies around the world. And partly because they had such a bank mess in the 1990s, their banks were really risk averse in the last few years and so don't have as much toxic stuff on their balance sheets as American or European banks.

The second reason, which is probably even bigger, is that there was a lot of the loose lending, the loose standards that we saw and credit around the world was funded by Japanese investment. You had huge amounts of savings in Japan that either directly was moved by the Japanese savers or by their banks into offshore lending. And now, that's all being unwound as people say, wow, things are worse in Europe, worse in Turkey, worse in Latin America than we thought.

SIEGEL: Like so many other things that we report on in this program, the recession is bigger in Europe right now.

Dr. POSEN: Absolutely.

SIEGEL: Well, if this is to be the monetary landscape, at least for the coming months or a year or two, who in the U.S., let's say, who benefits from it? Who does well via the dollar being much stronger than the Euro but the yen being still stronger than a dollar?

Dr. POSEN: The dollar on balance is much stronger that it's been because Japanese trade's only a part of it. That is actually good news for everybody in the sense that it increases our purchasing power. It means that the declining price of oil, which is already going down because of slowing world growth, goes down even further because the value of the dollars used to purchase the oil goes up. So, that's a big bonus to everybody in the U.S.

For exports, though, which have been the main source of growth in the U.S. for literally the last year and a half - two years, that's pretty much bad news. We are going to be exporting less, in part because our currency goes up versus Europe, versus most emerging markets, making our goods less attractive, and in part because other places are going to be consuming less because they're in bad shape.

The one bit of the exporters that may do well, I think, are agricultural exporters, people who ship timber and oranges and grains and maybe even beef because the Japanese in particular tend to import a lot of that from the U.S., and as the yen goes up, they'll buy more of that.

SIEGEL: Adam, thanks a lot for talking with us.

Dr. POSEN: Thanks for having me on again, Robert.

SIEGEL: That's Adam Posen, who happens to be in Houston, Texas today, and he is with the Peterson Institute for International Economics in Washington D.C.

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