"DOWN AND DOWN I go, . . . loving the spin I'm in" might have been written by Harold Arlen and Johnny Mercer as an anthem for the dollar. As it spins down, cries of both glee and anguish are heard in the land, and economists scramble to offer explanations.

Some of these experts are confessing confusion, as all--well, almost all--signs point to dollar strength. The latest jobs report shows that the economy is steaming ahead. The Fed has again raised interest rates. Investors are pouring cash into shares, consumer confidence and spending are up, oil prices are down, and retailers are rubbing their hands in anticipation as the Christmas season approaches. Meanwhile, business confidence in euroland is declining, reports show that the E.U.-U.S. productivity gap is widening as the European Union refuses to implement the reforms promised four years ago in Lisbon, and domestic demand in Europe remains flat at best. In short, everything seems to be in place for a dollar rally. Yet we see a $1.30 euro and hear talk of a $2 pound.

And down and down the greenback goes, dropping some 8 percent against the euro and 7 percent against the yen since Election Day. Exporters couldn't be happier, as their goods become cheaper in foreign markets. Bush's Treasury, which continues to say it supports a "strong dollar," is quietly celebrating in the belief that the cheaper dollar will begin not only to stimulate exports, but will also make imports more expensive, reducing the $600 billion trade deficit that most economists say is approaching an unsustainable 6 percent of GDP.

BUT THE LOSERS are also being heard from. Oil producers, who trade barrels for dollars, are grumbling that their cartel-inflated prices are declining in real terms. Jean-Claude Trichet, head of the European Central Bank, calls the dollar's fall, and the consequent rise in the euro, "brutal." And the president's home-grown critics have taken to the editorial pages of the Wall Street Journal to announce that "the great American middle class didn't re-elect President Bush so he could debase the currency." It is not the trade deficit, they argue, but excessively loose monetary policy that is fanning a flight from the dollar by investors who see an inflationary surge on the horizon.

There is, in fact, both more and less to the dollar's slide than most news stories would lead you to believe. The "more" is that if investors stampede out of a falling dollar, the U.S. economy might be in trouble. A depreciated dollar makes imports more expensive, and eases the competitive pressure that imported goods create for the made-in-USA variety. That means higher inflation, which would force the Fed to raise interest rates sharply, curtailing business investment, driving down the house prices that, when rising, add so much to Americans' wealth and optimism, and forcing consumers to retrench to meet the higher payments on their credit card debt.

The possibility of such an unpleasant drop is far from zero. The Chinese authorities must find work for their nation's rapidly urbanizing masses, and so are eager to keep their export industries operating at full tilt. To prevent the renminbi from rising, China has been buying dollars, and using those dollars to buy Treasury IOUs. That keeps U.S. interest rates low and stimulates growth in the American market, which then can continue to suck in all those low-priced T-shirts and sneakers that fill the shelves at Wal-Mart. Indeed, a lot more than apparel: on a recent visit to a Wal-Mart my wife and I were astonished to see stacks of shiny made-in-China GE and Sunbeam microwave ovens on sale for $29.99.

BUT THERE ARE INDICATIONS that the Chinese have had enough of this game. Rumor has it that China has been selling dollars and buying Asian currencies. If China indeed decides to end or moderate its support for the dollar, the dollar's slide will accelerate, with all of the consequences described above.

That's the "more." Here's the "less": When Ronald Reagan was in the White House, the economy was booming, the twin budget and trade deficits were rising, and the dollar was strong. In 1986, the finance ministers of the leading trading nations met at the Plaza Hotel and agreed to help the already falling dollar to move lower--by 40 percent, as it turned out. And lo and behold, the world did not end.

So a further decline in the dollar might prove a tonic rather than bad medicine. Think of it this way: A consumer who finds that the $1.30 euro makes a winter break in Spain a bit too expensive, will head for Florida, stimulating growth there.

The "less" that there is to this story also includes the possibility that the large trade deficit will in the end prove more sustainable, and for longer, than economists steeped in academic theory may think. The Chinese are riding a tiger, and can't easily get off. If they stop supporting the dollar, the value of all those bonds, notes and other dollar-denominated assets they hold will fall, with some experts guessing that a further 20 percent decline in the dollar will wipe as much as 3 percent off China's GDP. The Japanese authorities, too, are worried. Their economy's renewed growth is heavily dependent on exports, and they are not likely to sit idly by if the yen continues to rise relative to a falling dollar. So the Ministry of Finance is poised to resume intervention to shore up the dollar.

In short, the good news is that supporters of the dollar can't easily beak their habit, and that even if the dollar does continue to dance to the Arlen-Mercer tune, the enormously resilient American economy will adapt without a major hiccup, as it has in the past.

Irwin M. Stelzer is director of economic policy studies at the Hudson Institute, a columnist for the Sunday Times (London), a contributing editor to The Weekly Standard, and a contributing writer to The Daily Standard.

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