Dollar slides down tunnel of contradictions

HEADLINES yesterday reported, subconsciously perhaps, that Italian Prime Minister, Silvio Berlusconi, would “raise the dollar”, when he meets George Bush on December 15 in Washington.

The raising of it is a sentiment many support in these uncertain exchange rate times.

But nobody seems to be able to manage that feat of financial wizardry right now.

Were the dollar to do an about face it would in fact contradict every basic fact, or assumed fact about the state of the once mighty greenback.

As things stand we are looking at the euro going to $1.40 and the pound sterling being worth two dollars in the New Year.

This time last year that scenario would have looked highly improbable.

What has changed so fundamentally to alter the situation on global money markets in the meantime, is not an unreasonable question.

With the exception of Europe, the global outlook has improved quite significantly and the talk of double dip recession has vanished from the lips of most international commentators on the US. That double dip threat had been consigned to the dust bins of speculation even this time last year, so what has changed so fundamentally that the dollar looks to be headed ever downwards?

In hard economic terms it is probably fair to say nothing has changed at a basic economic level other than the weaker outlook for the euro zone.

If anything, US growth prospects are healthier than those of Europe which has cut its growth forecasts from 2.3% to 1.9% for 2005.

On top of that the ECB is believed to be on for another rate rise near term despite the worsening outlook for the region.

Add oil into the mix and the well worked cliché springs to mind concerning troubled waters.

Given the amount of uncertainties hovering over the globe it is remarkable the dollar hasn’t plunged rather than eased its way down to its current exchange levels.

At one time the world would be agog at the slide of the dollar and that alone would be seen as the forerunner of serious global meltdown. Not anymore.

We can add dangerously high oil prices and euro zone lethargy to this mix and still the optimists keep crunching their positive growth figures.

Can this continue with key global economic bellwethers sending contradictory messages without those factors finally conspiring to drag down the a major part of the global economy without mercy in the end.

It seems to me quite incredulous that the dollar has been cut adrift by the US authorities, Europe is slowing up and oil prices are a major worry. If they are not tell me why prices falling to $43 per barrel is seen as good news. It doesn’t stack up and it seems the headlong contradictions we are living with could cause serious upheaval in the period ahead.

One thing is certain - the US under John Snow as head of treasury and Alan Greenspan are expected to continue to play their “I stepped out, he stepped in again”, mummer routine, to ensure the dollar stays low for the foreseeable future.

That looks to be the policy stance of the Bush administration. Greenspan has said he thinks the dollar needs to be weak while Snow says he would like it to be stronger, but adds the US will not intervene to stop the slide. In other words, he wants it weaker too.

That’s the broad outline of US monetary policy right now.