Transcripts

The Home Economist: Who Really Wants A Strong Dollar?

SUSIE GHARIB: Americans have been hearing dire warnings recently about the dangers of a weak U.S. dollar and big deficits -- both the trade and budget deficits. Just yesterday, investors and economists were stunned by news of the nation`s record $60 billion trade gap. In tonight`s segment of the home economist, Brett Graff tells us why the story of the dollar and the twin deficits could have an unhappy ending.

BRETT GRAFF, NIGHTLY BUSINESS REPORT CORRESPONDENT: Once upon a time in a land called the United States, the dollar was strong and then things changed. The dollar grew weaker. In far away lands across the sea, currencies climbed. The euro, the yen, and others reached levels not seen in many years. The president and his Treasury secretary said they believed in a strong dollar policy, but not everyone believed this. Many private economists said that U.S. policy makers really did favor a weaker currency.

THOMAS BENFER, ANALYST, HARRIS NESBITT: There`s always this feeling that there`s a tacit approval that the administration is giving approval to a lower dollar. And so that`s why the investors, the traders in the market really disbelieve in a sense that they really want a stronger dollar.

GRAFF: With a huge annual current account deficit estimated at more than half a trillion dollars and a growing budget deficit, the markets didn`t want words. They wanted action. The chairman of the Federal Reserve issued his own blunt warning. Quote, given the size of the current account deficit, a diminished appetite for adding to dollar balances must occur at some point. But when and from what level of the dollar, regrettably, no answer is convincing, end quote. Weeks later, the president reaffirmed it was up to the markets to decide the relationship between foreign currencies and the dollar. But he promised to be tough and show fiscal restraint.

GEORGE W. BUSH, PRESIDENT OF THE UNITED STATES: We`ll do everything we can in the upcoming legislative session to send a signal to the markets that we`ll deal with our deficits, which hopefully will cause people to want to buy dollars.

GRAFF: The president and his advisors knew they had a big twin deficit problem on their hands. But they believed their policies would help spur economic growth and help eliminate the deficits. You see, people across the sea sent all sorts of goods on big ships every year. With a weaker currency, those imports would be more expensive, while American-made goods would be cheaper and become more competitive. U.S. manufacturers liked that idea. But not everyone was happy. You see, many Americans wanted to visit those far away lands, but now they found they would just have to change lots more of their dollars in return for just a handful of foreign coins to use on their travels. And some Americans liked the things made in those far away places, like cars, electronics and household goods. If they wanted the ones made say in Germany, France, Japan, and other countries, they would now have to pay more. But the president and his advisors felt sure, if they were very careful about their spending and with the help of a weaker dollar, the big, bad deficits would eventually go away and everyone would live happily for the foreseeable future. Brett Graff, NIGHTLY BUSINESS REPORT home economist.