US dollar to depreciate for another 2 or 3 years

Strong is good. Weak is bad. These generalizations sound simple enough, but they can be confusing when talking about money. Pravda.ru has interviewed Dr. Nariman Behravesh, Chief Economist and Executive Vice President for Global Insight, to find out the long-term perspectives of the US dollar.

Dr. Nariman Behravesh finds three main reasons for the weak dollar today.

- The huge U.S. current account deficit;

- Weaker growth in the U.S. compared with many other parts of the world;

- Market expectations that the Fed is on hold, while other central banks will be raising interest rates during the next year.

The greatest benefit of a weaker dollar is for the U.S., which has benefited (and will continue to benefit) from strong exports, Nariman Behravesh says.

According to the Board of Governors of the Federal Reserve System there are also other advantages of the weakening dollar. Among them are the following:

- U.S. firms find it easier to sell goods in foreign markets.

- U.S. firms find less competitive pressure to keep prices low.

- More foreign tourists can afford to visit the U.S.

- U.S. capital markets become more attractive to foreign investors.

However, the weak dollar has also a number of disadvantages. For example, U.S. Consumers face higher prices on foreign products/services. Higher prices on foreign products contribute to higher cost-of-living. U.S. consumers find traveling abroad more costly. Harder for U.S. firms and investors to expand into foreign markets.

A weak dollar also hurts some people and benefits others. When the value of the dollar falls or weakens in relation to another currency, prices of goods and services from that country rise for U.S. consumers. It takes more dollars to purchase the same amount of foreign currency to buy goods and services. That means U.S. consumers and U.S. companies that import products have reduced purchasing power.

At the same time, a weak dollar means prices for U.S. products fall in foreign markets, benefiting U.S. exporters and foreign consumers. With a weak dollar, it takes fewer units of foreign currency to buy the right amount of dollars to purchase U.S. goods. As a result, consumers in other countries can buy U.S. products with less money.

Ideally, the dollar and all nations' currencies should be valued at a level that is neither too high nor too low. Such a level would help sustain long-term economic growth and stability both here and abroad. However, this ideal is difficult to reach since many factors affect the value of a nation's money. Some of the factors are complex, but many are quite simple.

Speaking about long-term perspectives of the US dollar, Dr. Nariman Behravesh said that the chances of a collapse of the dollar are very small. It is in no one's interest for the dollar to have a "hard landing". Therefore, if such a scenario were to begin, central banks would intervene in a massive way.

Global Insight expects that the dollar will depreciate for another two to three years (with a dollar/euro rate of $1.50 by early 2009) and then stabilize.

Prepared by Alexander Timoshik
Pravda.ru