Strong U.S. Dollar Likely Damping Economic Recovery

By John S. McClenahen Acquisition-minded U.S. corporations like the currently strong U.S. dollar. Export-oriented manufacturers don't. And contrary to economic theory, at a time when the dollar should be declining in value, the inflation-adjusted trade-weighted value of the dollar has climbed by 5% since the end of 2000, notes UBS Warburg LLC, New York. One result: The strong currency is retarding U.S. GDP growth and partially offsetting the cumulative 275-basis-point reduction in short-term interest rates the Federal Reserve Board has instituted since January, says UBS Warburg. Maury Harris, the firm's chief U.S. economist, figures the Fed would have to cut interest rates by 35 basis points just to offset the GDP-damping effects of the strong dollar. What's more, Harris foresees the rising dollar muting the GDP kick expected from the individual income tax cut program now in place. "The Bush Administration is hoping that the extra cash will lift consumer spirits and finance brisker household spending," he notes. "However, the Fed's econometric model . . . suggests that the dollar's latest appreciation could blot out quite soon the lift from the coming tax cut," says Harris.

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