Feldstein: Panic Should Be Over Dollar, Not Euro

Friday, 12 Mar 2010 11:47 AM

By Dan Weil

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The euro’s recent drop to a 10-month low against the dollar won’t last, says Harvard economist Martin Feldstein.

The former chairman of President Reagan’s Council of Economic Advisers says that the euro’s decline is an overreaction to Greece’s debt crisis.

And the dollar will ultimately suffer from the exploding U.S. budget and current account deficit, he says.

“The euro is weakening despite their better trade balance,” Feldstein told Bloomberg.

“This is a kind of an irrational or panic selling where people are just saying, ‘I don’t know what is going on, I am just going to step to the sidelines and not leave money in euros.’”

The euro’s drop is an overreaction, he says. “After all, Germany is not at risk. France is not at risk.”

The euro, which recently hit a nearly 10-month low at $1.3436, traded at midday Friday at about $1.3757.

Europe doesn’t have to worry about attracting foreign money to finance its debt, unlike the U.S., Feldstein notes.

“If I wanted to be nervous about the future of a currency over the next, say, five years, there is more reason to worry given the size of the U.S. budget deficits and given the size, even more importantly, of our trade and current account deficits,” he said.

Not everyone sees it this way.

Hedge fund legend George Soros says the euro is in grave danger thanks to the flawed construction of the euro zone.

“If member countries cannot take the next steps forward, the euro may fall apart,” he wrote in the Financial Times.

Meanwhile, Standard & Poor's said this week that the U.S. dollar is still the most important world currency, but added that rising levels of U.S. debt and dependence on foreigners to finance much of pose risks to the currency's primacy.

Without a credible plan to rein in fiscal spending, the agency said external creditors could reduce dollar holdings, which could put pressure on the United States' 'AAA' credit rating, which keeps government borrowing costs low, Reuters reported.

For now, the credit ratings agency said the size of the U.S. economy — the world's largest — and the depth of its financial markets mean the dollar will continue to dominate global trade and foreign exchange transactions.

Those advantages helped the dollar retain its top status despite the financial crisis of 2008-09, which began in the United States, S&P said in the report.

The agency also said the dollar's role is an important factor supporting the United States' AAA credit rating — the highest investment-grade rating.

The main risk to the dollar's status comes from the growing amount of U.S. government debt, S&P said, particularly the share held by foreign central banks and sovereign wealth funds.

It also said widening U.S. fiscal deficits were a risk, adding "without a medium-term fiscal consolidation plan that the market views as credible, external creditors could reduce their dollar holdings, especially if they conclude that euro zone members are adopting stronger macroeconomic policies."

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