Despite hints to the contrary, the U.S. Treasury’s strong-dollar policy still holds. It is economic circumstances that have changed. The technology and telecommunications bust over the past year and a half in the United States has halted the foreign-direct-investment spree of $1 trillion since the mid-1990s along with domestic investment. Meanwhile, foreign portfolio investment in U.S. stocks and bonds has come to a halt as the stock market has plunged. In April the inflow of securities-buying from abroad actually reversed, to the tune of a $19 billion net foreign withdrawal. These vast foreign-capital inflows were what had driven the dollar skyward in the first place, offsetting a U.S. trade deficit that widened as the U.S. boom progressed. The trade deficit now runs at a rate of $450 billion per year, and with those foreign financial inflows temporarily stopped, it is no longer offset by capital inflows. As a result, it is draining $37.5 billion per month out of the United States.
America’s recent corporate-accounting scandals haven’t helped to quell foreign investors’ fears. But importantly, these frauds are believed to be concentrated in the once booming and now hurting energy, telecommunications and mergers-and-acquisitions sectors. The accounting of an overwhelming percentage of mainline businesses elsewhere will likely steer the U.S. economy through the current sea of scandal.
Still, until foreign confidence revives, the dollar will probably weaken. But the Treasury, for one, sees nothing to fret over. Foreign investors would be wise to follow the Treasury’s lead. If they lose all faith in American business governance and stampede for the doors, instead of just nervously tiptoeing out as they are now doing, they could create a new plunge in stocks. And such a dive might finally shake Americans so hard that the current economic recovery could be stopped in its tracks.
