Why U.S. Should Root for Dollar to Weaken More
Last year, the U.S. dollar did what economists had long predicted it would have to do: It fell in value against other currencies. And many believe that if Americans know what is good for them, they should be hoping for more of the same this year.</br></br>A weaker dollar creates plenty of hardships. Not only do European vacations get more expensive for Americans, so do Chinese-made television sets and other imported goods. For foreigners, a weaker dollar means their investments in the U.S. lose value. But in the eyes of economists, the more the dollar weakens, the more it helps alleviate one of the great worries of our time: The gaping U.S. current-account deficit.</br></br>The current account, which includes trade flows and other international payments, measures exactly how much Americans' spending is outpacing their income -- and how much they are borrowing from abroad to fill the gap. The U.S. is estimated to have rung up a deficit of about $900 billion in its current account last year. That is equivalent to nearly 7% of the U.S. economy -- a level that, if sustained, would cause the nation's foreign debts to pile up to dangerous levels.</br></br>A weaker dollar would help narrow the deficit by making U.S. exports more attractive to foreign buyers while making it costlier for Americans to buy products from abroad.</br></br>The fate of the dollar and the current account, which has worried economists for years, was a hot topic at this past weekend's annual meeting of the American Economic Association. A panel of prominent economists -- including Nobel Prize winner Robert Mundell of Columbia University, Harvard's Martin Feldstein and Kenneth Rogoff, Michael Mussa of the Peterson Institute for International Economics and Ronald McKinnon of Stanford -- held forth on the subject to a packed ballroom in Chicago.