Behind the dollar's lengthening slide

The American dollar showed signs of getting a bit flabby last week. Victory in Iraq didn't boost the dollar as expected.

Treasury Secretary John Snow repeated the obligatory mantra about the United States wanting a "strong dollar." That had little effect in foreign exchange markets.

On Wednesday, the dollar hit a four-year low against the euro, the common currency of 12 European nations. The greenback was also at a three-year low against the Canadian and Australian dollars.

The trend will be costly for Americans taking vacations abroad. Last year at this time they paid about 92 cents for a euro; now it will cost them about $1.11. French cheese and German cars could become more pricey for those staying home.

How come?

Well, sorting out the motives of the millions who buy and sell currencies each day is tricky.

Travelers generally just pay whatever exchange rate they get when using an ATM for cash or a credit card for a purchase. But investors influence exchange rates by deciding where to put their money - in the US, in Europe, China, or elsewhere. Most analysts figure their basic motive is simply trying to make a buck - or a euro, or a yen, or whatever other currency.

A question right now is whether war in Iraq, with its geopolitical consequences, has made the dollar less attractive.

It's important. As of 2002, foreigners owned 31.5 percent of US Treasury securities, 12.3 percent of government agency securities, 20.8 percent of US corporate bonds, and 11.5 percent of US stocks.

Some of that investment money, especially that in short-term Treasury securities, is owned by foreign central banks. China, Japan, Taiwan, and some other Asian nations have been piling up dollar assets, trying to prevent their own currencies from getting so strong that their domestic firms find it harder to export.

Foreign central banks bought a huge $96.6 billion of US assets, mostly Treasuries, last year, up from only $5.2 billion in 2001.

Private investors, though, are usually just making investments. "They are not making geopolitical decisions of any kind," says Richard Cooper, an economist at Harvard University, in Cambridge, Mass.

The war has left some hard feelings between the US and European critics. "But most investors are pretty hard headed on these things," says David Hensley, an economist at JPMorgan Chase Bank in New York. Its effect on investors will be "minor."

The US remains a sound place to invest, Mr. Cooper says. It doesn't confiscate foreigners' investments, as a rule. The inflation rate is sufficiently low that the value of their investments erodes only modestly.

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