Harvard's Feldstein Says Dollar `Too High to Be Sustained'
By Scott Lanman
Jan. 6 (Bloomberg) -- Harvard University economist Martin Feldstein said the dollar is vulnerable because of U.S. reliance on foreign government purchases of American securities, leaving the currency ``too high to be sustained.''
``The current high level of the dollar reflects some errors in understanding by the financial-market participants,'' Feldstein said during a panel discussion at the American Economic Association's annual meeting in Chicago today.
Some investors don't appreciate that much investment in the U.S. is coming from foreign governments, not private entities investing in the economy, Feldstein said. The central banks of nations including China and Russia have accumulated holdings of Treasuries through managing the value of their currencies. China's reserves amount to about $1 trillion.
The U.S. currency posted its fourth annual decline in five years in 2006, dropping 3.9 percent against the currencies of U.S. trading partners, according to the Fed's trade-weighted broad dollar index. The index, at 107.29 on Jan. 4, is still about 43 percent above its average since 1973.
Treasury Secretary Henry Paulson has repeatedly said that a ``strong'' dollar set freely in the foreign-exchange market is in the U.S. national interest.
Feldstein said the so-called ``strong dollar'' policy, followed by Treasury secretaries since Robert Rubin served under former President Bill Clinton from 1995 to 1999, doesn't mean the U.S. will act to protect investors in the currency.
Dollar Policy
The 67-year-old Harvard economist, who heads the National Bureau of Economic Research, the group that officially dates U.S. recessions and expansions, said his interpretation of U.S. policy is that American officials may be comfortable with a weaker exchange rate, as long as it doesn't push up U.S. inflation.
``We like to have a low inflation rate that protects the purchasing power of the dollar for American consumers,'' Feldstein said. ``A strong dollar at home, but a competitive dollar abroad.''
Feldstein suggested that U.S. policy is inconsistent because while advocating a strong dollar, officials are pressing China to allow the yuan to appreciate at a faster pace. The yuan is also known as the renminbi.
``The statement `a strong dollar is good for the United States' is a nice slogan, but that's all it is, a nice slogan,'' Feldstein said. ``It's clear that the U.S. government would like to see the dollar decline relative to the Chinese renminbi, and if so, why not against other currencies which we have large trade imbalances.''
Current Account
Feldstein spoke in a panel discussion addressing the dollar and the U.S. current-account deficit. The session also featured Harvard economist Kenneth Rogoff and Peterson Institute for International Economics economist Michael Mussa, both former chief economists at the International Monetary Fund; Nobel laureate Robert Mundell of Columbia University; and Stanford University's Ronald McKinnon.
In the third quarter, the U.S. current-account deficit widened to a record $225.6 billion as the trade gap widened and the country paid more interest to overseas investors. The current account is the broadest measure of trade because it includes transfer payments and investment income.
Foreign investors hold about half of the $4.3 trillion of marketable Treasuries outstanding, according to monthly figures from the U.S. Treasury. Official holdings totalled $1.3 trillion in October, the Treasury said on Dec. 15.
Feldstein said that media don't pay enough attention to data on foreign official holdings of U.S. securities.
Rogoff said that while the dollar will probably weaken as the U.S. current-account gap narrows, ``I don't think it's going to be a catastrophe.''
In 2005, Feldstein was considered by some investors to be a candidate to replace Federal Reserve Chairman Alan Greenspan. President George W. Bush chose Ben S. Bernanke, then a White House economic adviser and a former Fed governor and Princeton University economist. Bernanke took office in February 2006.
AI
