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The case for a weak (US) dollar policy

October 27th, 2002

American commentators are finally waking up to the fact that a strong currency does not necessarily imply a strong economy. I made this point 18 months ago, here and I think the analysis still stands up pretty well, even if US consumers are still spending.

One interesting point in the article is the idea that even though US investments are unattractive, investments in other countries are even less so. I disagree. If you accept that the $US has to depreciate at some time, then holding bonds denominated in $US, and paying interest rates lower than those obtainable in other currencies, is a dumb idea. Unless you think either that European governments are likely to default on their debt or that euroland is poised for inflation, eurobonds are a better bet, and similarly for Australian government bonds denominated in $A. But I’ve given up even the residual belief in the efficient markets hypothesis that would lead me to try and work out a coherent explanation of perverse asset prices.

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