Behind the dollar's lengthening slide

But right now, interest rates in Europe are higher than in the US, where short-term rates are at the lowest in 40-plus years. So private investors are more tempted to buy European stocks, bonds, and notes. Further, some foreign investors are troubled by the rapidly expanding US federal deficit.

The Treasury announced last Wednesday it plans to sell a record $58 billion of new three-, five-, and 10-year notes this week to partly finance the deficit. That deficit, experts reckon, will exceed $400 billion this fiscal year as a result of the Iraq war and the loss in revenues from the economic slowdown and tax cuts.

"It's bearish for the dollar," says Robert Hormats, a director of Goldman Sachs International in New York. Like many other experts, he sees the dollar falling further in the months ahead. Whether it will be a fast or slow decline is anybody's guess.

"Avoiding a rout in the dollar would be a good thing," says Jane D'Arista, an economist with the Financial Markets Center in Philomont, Va.

The dollar will have to drop another 15 to 20 percent to reach a level where it encourages enough US exports and discourages enough imports to make the nation's balance of payments deficit sustainable - not disappear, reckons Dean Baker, an economist at the Center for Economic and Policy Research in Washington. The US will remain a "safe haven" for some foreign investment money, he says.

Last year, the deficit in the US current account was running about $500 billion, or 5 percent of gross domestic product, the nation's output of goods and services. "You need a big change to correct that sort of imbalance," says Mr. Baker.

With the dollar down only 5 percent so far since its peak in February 2002 - measured against the currencies of most of its trading partners - and with the price of oil again weaker, Mr. Hensley forecasts only the stabilization of the current account deficit. It shouldn't expand further.

Like Americans, foreigners haven't been making big new investments in US stock. They have been buying more bonds.

And last year, "net US purchases of all foreign securities turned negative for the first time in more than 40 years," Hensley notes. Their purchases of foreign stock declined more than 80 percent between 1999, during the bull market, and 2002.

The "big story," according to Hensley, is that US companies have slashed their investments abroad. Also, private foreign-capital flows into the US have declined by $165 billion, or nearly 25 percent, between 1999 and 2002.

Last Monday's Economic Scene column, dealing with executive pay, reported that the AFL-CIO "is petitioning" the Securities and Exchange Commission to give institutional investors more clout in selecting independent directors. A more precise phrase would have been, "preparing to file a petition."

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