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May 05, 2006

The crazy dollar

With the U.S. running a large trade deficit with the rest of the world, experts have expected the dollar to drop in value against other currencies. But N.C. State University's Mike Walden says that just hasn't happened -- at least not through 2005.

"Contrary to all the experts, the dollar actually got stronger against foreign currencies, and this really has economists scratching their collective heads," says Dr. Walden, an economist with the North Carolina Cooperative Extension Service.

"A couple of possible explanations: One is that foreign countries want a strong dollar -- particularly China -- so that their imports can continue to be sold to a big U.S. market. ... As a consequence they are purchasing U.S. investments in order to keep the dollar from falling. That’s one theory.

"Another theory is that the trade deficit is really improperly measured -- that it misses our surpluses and intellectual property and returns from foreign investments, and when you include those we don’t have a trade deficit. And that would be one explanation for why the dollar hasn’t fallen.

"But whoever is right we certainly want to watch the dollar and what it does this year."

Posted by deeshore at May 5, 2006 08:00 AM