Currencies

The news is that the dollar has fallen to a new low of 1.4438 against the euro (although it came back a bit in later trading). The euro had been launched at around a dollar. So is this a good thing or a bad thing? And for whom?

The position of the US is that it has been spending more than it has been earning for some time now. It has a massive trade deficit. When it buys goods from China, it pays in dollars but the Chinese manufacturer is not allowed to hold dollars so it sells them to the central bank at a fiddled exchange rate with which it can't argue. The Bank of China then invests these dollar funds in American government stock (called T-bills). So China is lending the USA money to buy Chinese goods. The only way to get out of this deficit position is for the USA to devalue. Then the value of China's T-bill holding would go down (tee-hee) and China's exports to the US would become more expensive. But the Chinese weren't born yesterday, and their fixed yuan-$ exchange rate followed it up before it went down, and they are refusing to revalue. They may be forced to, however if the dollar falls against all other currencies; which it is trying to do.

Things are different for the euro. Consumer demand from more cautious European consumers has been much weaker than in the US. The euro-area's growth has been from exports (that is to say the factories have been working but non-Europeans have been buying the goods). And to keep your exports competitive you need a cheap currency, not one which is shooting up in value against the dollar, in which so many commodities from oil to wheat are valued.

So there was something of a race to the bottom - both the USA and the Euro trying to remain cheap - and it seams round one is to the US. I once read that the Airbus would be uncompetitive at 1.35. Presumably now it is losing money hand over fist.

Germany has in the past shown the way to manage a strong currency and export: go up market, keep your quality high, keep your costs low. It remains to be seen whether the eurozone can do this. If the dollar falls much further - and the US would like it to - there will be growing unemployment in Europe which will become a political problem.

Cut the regulation. Cut the taxes. But they won't listen.