The current account deficit (which measures the balance of trade in goods and services with the rest of the world) of the United States now stands at 5 per cent of the GDP, which can be considered as high by any standard. This deficit is financed by borrowing from the rest of the world. (The US needs $50 billion dollars a month in capital inflows.) To make things worse, the US also runs a huge federal budget deficit. These deficits are the principal reasons for the fall in the value of dollar. In other words, the outside investors and lenders are gradually losing confidence in the American economy. This was the principal reason why in 2003 alone the dollar lost 17 per cent against the euro. Is the United States government happy about this situation ? Is the American government doing anything to stop the dollar from sliding further?

One must bear in mind that 2004 is an election year and therefore, the government policy is geared to winning the election in November. Since a weak dollar makes American products cheaper overseas, it should help the export market. At the same time foreign imports become more expensive in the US which helps domestic competitors. Bush administration hopes that this policy would give a much-needed boost to the American economy. During Bush's presidency, American economy has lost several million jobs. According to government sources, the current unemployment rate is 5.9 per cent, but many economists think that the real figure is much higher. According to Paul Krugman, "an unusually large number of people have given up looking for work, so they are no longer counted as unemployed, and many of those who say they have jobs, seem to be only marginally employed". The government hopes that this policy will eventually create millions of jobs, which will definitely ensure Bush's re-election. Again detractors think that since most of the productivity growth is technology-driven, American economy is not in a position to create millions of jobs in the near future.

The Bush administration has, in effect, adopted a weak dollar policy. It has been lobbying China and Japan to let the dollar fall against their currencies. In a recent statement, Ben Bernanke, a Federal Reserve governor made it clear that the American government was not particularly concerned about dollar's decline. He said that the Fed was more interested in nurturing the ongoing economic recovery than anything else. (In the third quarter of 2003, GDP rose at an annual rate of 8.2 per cent.) He also predicted that the growing demand will not create inflationary pressures (current inflation rate of 1.1 per cent is the lowest in forty years) because of rising productivity and weaknesses in the labour market, where wage pressure is virtually nil. It is a good combination of factors for economic recovery, -- low interest rate (only 1 per cent), low inflation, rising productivity and no wage pressure. Under these circumstances, the American government is quite willing to let the dollar slide against other major currencies as long as it can get away with it. But will the world keep financing the American deficit at such a low interest rate especially when everyday its investment in dollar is worth less than the previous day? It is highly unlikely that this situation can continue over a long period of time. Longer term interest rates have already started going up. It is only a question of time before the Fed is forced to raise short-term interest rates as well. Then how will it affect the economic recovery in the US? (Let us save this topic for another day.)

And what about the euro area? How is the sliding dollar affecting the economic recovery in the EU?

Actually the EU has got an unfortunate combination of economic factors which is hindering rapid economic recovery. The EU is trying to hold off a recession, has got relatively high interest rates (2 per cent) in comparison with its competitors like the United States (1 per cent) and Japan (0.10 per cent), and a strong currency.

Leaving aside the Chinese government policy of pegging the yuan to the dollar, which effectively prevented the yuan from rising against the dollar, the Japanese government last year spent close to $200 billion intervening in the currency markets to buy dollars to curb yen's rise. Yet despite this intervention, dollar fell by almost 10 per cent against yen in one year. In this context, it is relevant to mention that the euro also rose against Japanese yen (8 per cent) and pound sterling (9 per cent).

The European Central Bank had forecasted a modest economic growth (1.6 per cent) for the euro area in 2004. But this forecast was based on two important factors: first, that most of the growth will be export-driven and second, that the maximum exchange rate will be $ 1.17 per euro. As mentioned before, on the first day of trading this year, the dollar slid close to $1.26 per euro. On 6th January, the euro burst through the psychologically important barrier of $ 1.27 for the first time ever. It seems that the American government is quite willing to let the dollar fall to $1.40 per euro or even further. Under these circumstances, it would be extremely difficult for Germany, France and Italy, the three economic motors of the euro area to pick up speed and eventually pull the other smaller economies out of virtual recession. In the euro area, the unemployment situation worsened during 2003, which now stands at approximately 9.0 per cent.( In Spain, the official unemployment rate is 11.0 per cent.

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Some European economists are relishing the thought of having a strong currency. The plunging dollar has pushed the euro to occupy the position of the second reserve currency of the world and to be used as an international currency for debt issues and international trade. It is indeed gratifying for the Europeans to learn that euro is gradually replacing the dollar as the international currency in which trade between Japan and the EU is conducted. Yet, in spite of all this, I feel that the time has come for the European Central Bank to stop macho posturing and start intervening in the currency market to curb the rise of the euro. There is no doubt that a constantly rising euro harms euro area's exports and therefore slows down its economic recovery.