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Fed: No trade crisis?
WSJ: Study says current-account gap unlikely to precipitate sharp drop in dollar, stocks.
March 3, 2005: 6:40 AM EST

The gaping U.S. current-account deficit is unlikely to trigger a financial crisis that drives down the dollar, stocks and bonds, Thursday's Wall Street Journal reported, citing a new study from the Federal Reserve.

In fact, the study suggests that the more the dollar drops, the faster the economy is likely to grow.

The study responds to growing concerns that the U.S. current-account deficit - - the shortfall on all trade and investment income with the rest of the world -- could trigger a crisis. The deficit topped an estimated $600 billion, or almost 6% of gross domestic product last year, which was financed by the U.S. selling an equivalent sum in stocks, bonds and other assets to foreigners. Some analysts worry that foreigners will soon balk at buying more U.S. assets, triggering a sharp drop in the dollar, a drastic increase in interest rates, and a recession.

But the study finds almost no evidence of such "disorderly corrections," the phrase it uses rather than "crises," in its review of previous episodes when the U.S. and other countries had to shrink large deficits. "We . . . find no evidence that current account reversals are associated with sharp declines in asset prices," says the study, posted this week on the Fed's Web site.

Far from a drop in the dollar leading to a recession, the study finds that economic growth was "positively correlated" with the decline in the exchange rate. While in some cases economic growth did slow, the study argues that " shortfalls in growth led to declines in currency values rather than vice-versa."

The study is by Fed staff economists Hilary Croke, Steven Kamin and Sylvain Leduc. While Fed staff may have different viewpoints from Chairman Alan Greenspan , in this case the two appear in agreement: Mr. Greenspan worries about the current-account deficit, but thinks it is unlikely to result in a crisis.

Wall Street Journal Staff Reporter Greg Ip contributed to this report. Dow Jones Newswires 03-02-05 2236ET Copyright (C) 2005 Dow Jones & Company, Inc. All Rights Reserved.  Top of page


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