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U.S. powerless to dollar's plunge?
The not-so-almighty dollar will keep deflating, analysts say, pushing prices up for U.S. consumers.
January 13, 2005: 5:16 PM EST
By Aaron Smith, CNN/Money contributing writer

NEW YORK (CNN/Money) - The not-so-almighty U.S. dollar will continue to lose strength as the trade deficit widens, and there is little or nothing that the government can do about it, according to analysts.

The impact on the American consumer will be felt most by travelers overseas, said David Wyss, chief economist for Standard & Poor's, who expects the dollar to fall 10 percent by the end of the year.

"Your next European vacation is going to cost a lot more, and you're going to see lot more European tourists running around New York," said Wyss.

Even the consumers who stay at home will see prices climb on some, but not all, foreign imports as a result of November's $60.3 billion trade deficit, which is mostly comprised of trade with Europe, Japan and China, according to analysts. The ballooning deficit causes the dollar's value to shrink in foreign markets, resulting in higher prices on foreign goods.

Americans could face rising prices on imported cars, and possibly on American cars too, though that would come later. "Even a Chrysler has some imported parts in it and because these Toyotas are a little more expensive, Ford might be charging more," said Wyss.

While prices on Japanese imports are expected to climb, prices on any product bearing a Made in China label will likely be unaffected because the Chinese government keeps its currency fixed, said Wyss, despite the trade deficit with China.

China comprises more than a quarter of the trade deficit, according to Ashraf Laidi, chief currency analyst with MG Financial Group, nearly doubling the European Union's share of 13 percent.

Foreign banks prop up dollar

The dollar dropped sharply on Wednesday following the trade deficit announcement by the Commerce Department. Analysts looking at the bigger picture said the dollar has been on the decline since hitting its peak in 2002, and they expect it to keep sliding against foreign currencies, at least in the short term, before it takes a turn for the better.

"It's Newton's law of currency: Any overvaluation will be followed by undervaluation," said Wyss.

Wyss, who believes the dollar is currently trading at "equilibrium" value, said the dollar could slide for another three years before bottoming out. However, David Solin, partner with Foreign Exchange Analytics, said the dollar will be on the road to recovery before the year is out.

"A year from now, we're probably not going to see much of a difference from where we are now," said Solin. "But in the interim, we will go through another bout of this dollar weakness." Solin said the dollar would continue to experience "an orderly decline" over the next few months, avoiding a "crisis," until it manages to recover lost ground by the end of the year.

Over the next year, John Lonski, chief economist for Moody's Investors Service, projected that the dollar should regain much of its strength against the euro while continuing to fall against major Asian currencies, because Europe commands a smaller share of the deficit.

Raising the interest rate is about the only thing the U.S. government can do to control the dollar value, said Lonski, but this measure would have only a limited impact compared to the investment of overseas governments in U.S. currency.

The governments of China and Japan have played an active role in buffering the dollar against further declines. Lonski credited the central banks of China and Japan as being "big players" in strengthening U.S. currency, in showing a willingness "to soak up dollars and possibly avoid a precipitous drop in the dollar's exchange rate."  Top of page


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