The Currency Quandary

Two views about today's prevailing exchange rates exist: the dollar is overvalued dollar and the yen needs a deep depreciation. The implication of the two is an explosion upward for the Euro. But can Europe deal with such a shock, and what would happen to the US if that happened?

Now that America's recovery is underway - and it arises from a slump not a recession - the current account deficit will widen even further and in no time discussions about the unsustainable high-flying dollar will become fashionable again. Yet, the very fact of a US upswing that is bigger, comes sooner, and is better than anywhere else - Europe remains plagued by growth cramps and Japan's economic policy kabuki is going nowhere - will support and even strengthen the dollar.

All those who predicted the collapse of America's ``house of cards'' economy (who thought that Enron's collapse was finally the sign in the sky that they were right) must now be exhausted. No dollar collapse looms. Financial stability, strong productivity, flexibility and dynamism make the US one of the choice places for capital, and this influx of capital finances America's large current account deficits. It will continue doing so until, at the end of the rainbow, Japan or Europe compare favorably with the US investment climate. Don't hold your breath for that day; don't wait for the $1.20 per Euro that is touted as the ``equilibrium'' rate.

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