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Sinking Dollar Dominates Davos Debate
The Ledge/NY Times
New York Times
Thursday, January 27, 2005

DAVOS, Switzerland, Jan. 26 - Two things were as clear as the Alpine air on the opening day of the World Economic Forum on Wednesday: The relentlessly sinking dollar is Topic A, and anyone hoping for an answer to when it will stop dropping is likely to come away disappointed.

Economists, politicians and business executives voiced deep unease about the imbalances in the global financial system, which are reflected in the dollar's steep fall against the euro and other currencies.

But most expressed skepticism that the Bush administration would reduce the trade and budget deficits, which have fed those imbalances. The White House has said that it does not view these issues as a major problem because foreigners still view the American economy as an attractive investment.

Some at the forum said they doubted that China, which is financing much of the American debt, would bow to pressure to allow its currency to rise against the dollar this year.

"The U.S. current-account deficit is a problem for the whole world," said Jacob A. Frenkel, a former governor of the Bank of Israel. But, he said, "I don't see the budget deficit being taken seriously."

The Bush administration, which dispatched Vice President Dick Cheney and Secretary of State Colin L. Powell to past Davos meetings to defend the Iraq war and other foreign policy actions, has not sent a similarly prominent economic policy maker to this gathering. That absence has lent the proceedings an imbalanced tone.

"In fairness, it's a transition period in Washington," said Representative Barney Frank, Democrat of Massachusetts, who supplied the American voice on a panel about American leadership. He added, however, "The administration doesn't really have anyone they trust enough to send here."

Mr. Frank, the ranking Democrat on the House Financial Services Committee, said that he worried that the United States was not paying enough attention to the risks of its growing indebtedness. The repercussions of a weak dollar, he said, had barely registered with the White House.

Other critics were blunter.

"There's nobody home on economic policy in America right now," said Stephen S. Roach, the chief economist at Morgan Stanley. The twin burdens of household and public debt in the United States, he said, are unsustainable. Describing American consumers as "an accident waiting to happen," he asked, "When does the music stop?"

With the dollar already trading at $1.30 to the euro - near the level of economic unacceptability for Europe - Mr. Roach said the United States could not rely on currency markets to right the imbalance between it and the Asian countries that finance American deficits by buying Treasury bills.

The answer, he said, lies with the Federal Reserve, which he said would have to raise rates aggressively to curb the spending binge. Whether it could do that without triggering a recession is an open question.

Few here held out hope for international coordination of the kind that stabilized the dollar in the 1980's.

"The Bush administration doesn't listen to people," said Laura D. Tyson, who served as an economic adviser to President Bill Clinton. "There's no hope of changing U.S. fiscal policy."

Professor Tyson, who is dean of the London Business School, said European leaders needed to stop worrying about the actions of other countries and set about streamlining their own economies. She pointed to recent wage negotiations in Germany, in which the unions agreed to longer hours and more flexible work rules, as a hopeful sign of change.

Certainly, Europe cannot rely on Asia to take the pressure off the euro. While people here said they were guardedly optimistic that China would eventually allow its currency, the yuan, to rise against the dollar, few were willing to hazard a guess as to when - or to what extent.

"That will need a political commitment and a political will, and I don't see that happening this year," said Takatoshi Ito, a specialist in international economics at the University of Tokyo.

Some economists warned that the expanding trade deficit and weak dollar could cast a shadow over negotiations to liberalize world trade, which have been dragging for various reasons in the last year.

China's record trade surplus with the United States could fuel protectionist forces in the United States, said C. Fred Bergsten, the director of the Institute for International Economics in Washington. He said he could foresee moves to impose import barriers on Chinese wood and shrimp. "This is a poisonous environment for trade policy and for domestic politics in the United States."

In the last couple of years, with the White House's march to war in Iraq, Davos itself has been a rather poisonous environment for Americans. Those tensions have ebbed this year.