Dollar Drop Reflects ‘Real Cause for Concern,’ Holtz-Eakin Says
The dollar’s slump reflects concern among investors about the “dismal” state of the U.S.’s public finances, said Douglas Holtz-Eakin, a former director of the Congressional Budget Office.
“There’s real cause for concern in that the U.S. has for a long time presented a fiscal outlook that was fundamentally out of balance,” Holtz-Eakin, chief economist in former president George W. Bush’s Council of Economic Advisors, said in an interview in London today. “World markets have always assumed the U.S. would fix this somehow. The financial crisis and recession have now compressed this problem.”
The dollar fell against the yen to its lowest since July 1995 earlier today after the Federal Reserve said on Nov. 24 that its drop was “orderly,” a signal to traders that the U.S. won’t prop up the currency. Under President Barack Obama, the nation’s budget deficit reached a record $1.4 trillion in the fiscal year that ended Sept. 30.
“If you can take care of the fundamentals, the dollar will follow,” Holtz-Eakin said. “People don’t believe Obama on the deficit. So far there’s been nothing in his campaign or his actions which show a seriousness on cutting back government programs and bringing things back into balance.”
Holtz-Eakin was chief economic adviser to Republican presidential candidate John McCain in 2008.
Dollar Index
The yen strengthened today to 86.30 per dollar, a 14-year high, and traded at 86.69 as of 11:45 a.m. in London. The Dollar Index, which tracks the greenback against the currencies of six trading partners, has dropped about 9 percent so far this year and 16 percent since its 2009 peak in March.
Fed officials said in minutes of their Nov. 3-4 meeting released on Nov. 24 that the dollar’s decline has been “orderly” and that they would watch for any signs that the depreciation is pushing up people’s expectations for inflation.
“Regardless of interim moves in the dollar, you will not see the Fed move” by tightening policy to protect the currency, Holtz-Eakin said. “They are solely focused on ensuring the U.S. unemployment and output situation improves and they have been very clear that it will remain in its current stance for an extended period.”
The Obama administration should use fiscal measures to bolster confidence in the currency, Holtz-Eakin said.
“It reduces the issue and would improve the outlook for investments in the U.S. because on the current trajectory there will be no choice other than to dramatically restrict services or raise taxes,” he said. “That’s not a very inviting investment climate. Taking care of business there will take care of all things that will strengthen the dollar.”
Holtz-Eakin is now president at DHE Consulting LLC in Washington.
Filed under: finance by John