[...]... implications the strong dollar and the very large US current account deficit and external debt have for the US and world economies The second is the sustainability of the exchange rate of the dollar in the financial markets, especially in light of the other bubbles that have recently burst Facts The value of the dollar soared from 1995, when it hit its all-time lows, until the beginning of 2002 Depending... the letter and spirit of the law, which is clearly intended to deter competitive depreciations by other countries ` Are there any new policy initiatives vis-a-vis the dollar that should be adopted by the United States, the G-7, or anybody else? The administraOVERVIEW 11 73632$CHOV 0 1-2 2-0 3 05:51:48 tion, including the Treasury, has not used the term ‘‘strong dollar ’ for over a year Nevertheless, they... responsibilities in a world where China and other countries in East Asia, as well as Canada, are running large current 12 DOLLAR OVERVALUATION AND THE WORLD ECONOMY 73632$CHOV 0 1-2 2-0 3 05:51:48 account and/ or basic balance surpluses The third concerns how the IMF (and conceivably the World Trade Organization) could play a more active and effective role in monitoring and disciplining intervention in the currency... domestic demand and a sharp decline in the dollar The likely alternatives for the dollar in the coming years can perhaps be bounded by the following cases A decline of 15 percent would result in a return to fair value reflecting relative productivity levels and would 18 DOLLAR OVERVALUATION AND THE WORLD ECONOMY 73632$$CH1 0 1-2 9-0 3 11:25:37 Figure 1.2a US dollar/ Japanese yen: GSDEER, 197 4-2 002 GSDEER... rationalize the strong -dollar rhetoric of the Clinton administration—which actually started in 1994, when the dollar was weak and still weakening—as having been consistent with the rather satisfactory behavior of the US economy during that period (There was never any strong -dollar policy Indeed, the administration’s only direct dollar operations since 1995 were to sell dollars for yen in 1998 and for euros... relationships since the 1980s Table 1.1 compares the current and earlier 1 Fundamental equilibrium exchange rate 16 DOLLAR OVERVALUATION AND THE WORLD ECONOMY 73632$$CH1 0 1-2 9-0 3 11:25:37 weights for several countries as computed in the broad trade-weighted dollar index formulated by the Federal Reserve Board (Leahy 1998) The Fed’s index is based on three separate indices for imports, exports, and third-party competition... by the strong exchange rate of the dollar, the large and growing US external deficit, and the counterpart surpluses elsewhere around the world It reached a fairly strong consensus on the need for an eventual correction of the dollar overvaluation, but less agreement on the timing of that correction, the amount of adjustment needed (10 to 25 percent), and the distribution of that adjustment among other... by 15 percent of the desired reduction in the US deficit (He argues that ‘‘Japan’s share’’ of the US adjustment is between 10 and 25 percent, depending on whether this share is calibrated on current account surpluses, trade shares, or bilateral trade, and then selects the intermediate 8 DOLLAR OVERVALUATION AND THE WORLD ECONOMY 73632$CHOV 0 1-2 2-0 3 05:51:48 figure of 15 percent as the basis for his...other financial) markets posed by the dollar s recent levels The Institute sought to convene experts from a wide variety of countries and viewpoints on the topic to discuss the appropriate rate for the dollar over the medium run, the implications for other major currencies, and the policy measures that might be available to do something about it The overview chapter summarizes the main conclusions and. .. US standpoint) it would be desirable to complete the correction, or at least to push it further, sooner rather than later Of course a dollar decline means an appreciation of other major currencies like the euro, the yen, the Canadian dollar, the Chinese renminbi, and the pound sterling The counterpart countries have not all been as content with the adjustment as the United States has, even with the . Asia at the World Bank during 199 6-9 9. 2 DOLLAR OVERVALUATION AND THE WORLD ECONOMY 73632$CHOV 0 1-2 2-0 3 05:51:48 And if one compares the current account deficits that have materialized in the two. to counter the looming deflation that he 6 DOLLAR OVERVALUATION AND THE WORLD ECONOMY 73632$CHOV 0 1-2 2-0 3 05:51:48 views as the major economic problem facing the United States and the world. It. concerns about both the real economic impact of the strong dollar of the second half of the 1990s and the risks for the stability of the currency (and perhaps x 73632$CHF3 0 1-2 4-0 3 08:42:33 other financial)