OECD: Dollar Fall May Boost U.S. Long-Term Rates

By Agence France-Presse The decline of the dollar could slow the pace of the U.S. economic recovery by leading to a rise in U.S. long-term interest rates which would in turn weigh on domestic demand, the Organization for Cooperation and Economic Development (OECD) said Oct. 24 in its semiannual Financial Market Trends report. The OECD said Asian governments had been major buyers of U.S. assets as part of their strategies of preventing their currencies appreciating against the dollar. But after the recent call by the Group of Seven rich nations for greater exchange rate flexibility -- widely seen as a call for Asian countries to allow their currencies to strengthen against the dollar -- these official purchases of U.S. assets may decline, the OECD said. "Should such purchases now come to an end, the pursuant fall in demand for U.S. treasuries could increase U.S. interest rates, assuming private demand for U.S. assets does not offset the drop in official demand," it said. The weaker dollar could therefore have negative, as well as positive, effects on the U.S. economy, it said. "On the one hand the falling dollar should have positive effects in terms of U.S. competitiveness and should bring current account deficits back to more sustainable levels. On the other hand, higher interest rates could impact on domestic demand, possibly countering the increases in export demand," it said. Copyright Agence France-Presse, 2003