The Dollar: Beggar My Neighbor, or Myself?

The headline in today’s Wall Street Journal says “World Tries to Buck Up the Dollar.” The headline writer no doubt savored the opportunity to use “buck” for its double meaning even though it might have been more accurate to say “World Tries to Hold Down It’s Currencies.” That would have gotten closer to the world’s motivation.

The second paragraph acknowledges this implicitly when it says “Thailand, South Korea, Russia, and the Philippines have been snapping up dollars this week in order to hold down the value of their currencies.” It goes on to say that Brazil’s finance minister said the country’s currency remained too strong even after Brazil adopted some capital controls to weaken it.

While a majority of pundits on financial TV argue for a strong dollar to boost—or should I say “buck up” the U.S. economy, the rest of the world seems to understand that a weaker domestic currency would help them get out of recession, unless, of course, all or most countries do it and cancel each other out. Such confusion is an important reason countries should adapt domestic policies to domestic needs and let their exchange rate adjust to reconcile those with the outside world. 

Yesterday, rumors were going around that China might soon restore the gradual appreciation of its yuan, which implies a weaker dollar relative to the yuan. That would be helpful both to China and the U.S. since the U.S. trade deficit is largely China’s trade surplus. But wasn’t it just the day before yesterday that China was urging the United States to strengthen the dollar, which would imply a weaker yuan. Consistency is difficult to maintain as blog writers will tell you.

I visited China in 2003 and 2006 and made several speeches and gave several TV interviews. I kept making the point that China’s exchange rate was China’s business, but then I pointed out that holding the yuan down was subsidizing U.S. consumers at the expense of their own. The first part of my message was not really correct since every exchange rate has two sides and affects both parties, but I thought it best to be diplomatic about it. During both periods the U.S. was trying to pressure China to appreciate the yuan, and I was convinced that China would do so only if we quit urging them to publicly.

One of the huge mistakes made early in the Great Depression was the severe Smoot-Hawley trade law, which led to competitive devaluations all over the world and triggered a sharp shrinkage in world trade. We haven’t gone that far yet in our Great Recession, but we are on a slippery slope. Exchange rate manipulation can do harm similar to tariffs and non-tariff barriers to trade. Once we start the game of competitive exchange rate changes it can easily get out of control. Instead, let’s follow Milton Friedman’s advice and keep the float clean.

Comments (5)

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  1. T Le says:

    Do you see the price of oil as a better determination of the value of the dollar?
    Thank You

  2. Bob McTeer says:

    Oil affects the dollar and vice versa. The CPI is a reasonably good measure. Import prices, including oil, are included on a weighted basis.


  3. T Le says:

    Tomorrow is the import price index and next Wednesday is the CPI. It would be great if you comment on them in your blog.
    Thank you.

  4. John B says:

    In July you knocked the Monetary Base graphs as “egregiously” dramatic. What about the St. Louis Fed’s current Monetary Base graph? Is the recent spiking enough for USD bulls to worry about an overly abundant supply of US money vs demand?

  5. Bob McTeer says:


    I’m traveling and can’t look up the graphs. As I recall, I was bothered about the squeezing up of the horizontal axis on the first graph.

    As to your question, I don’t know whether it is enough or not. It is important to remember however that most of the base growth is in the form of excess reserves held by banks. Since they are holding them voluntarily, I assume they perceive a need for them. As long as they are just sitting there, they aren’t likely to affect the dollar one way or another.

    Thanks for your question.