Proposition number 1: the "weak" dollar is not something to get worried about by itself. Proposition number 2: the current trade deficit is not necessarily insurmountable or unsustainable. Check this out (from, of course, The Economist, June 2008):
Thanks in part to a weaker dollar, exports have helped prop up theSo, a weak dollar is a natural and healthy economic response to a trade (current account) deficit.
ailing American economy. But the current-account deficit has not
narrowed by as much as hoped.
Against other gauges, however, the greenback may still be overvalued. One is the fundamental-equilibrium exchange rate (FEER), which is the rate consistent with a steady economy at full employment and a sustainable current-account balance.Not only may the "weak" dollar be healthy, but it might still have further to fall. Not only that, but the trade deficit (even if depreciation does not fully close it) is not necessarily unsustainable or even avoidable.
In a forthcoming paper, Richard Cooper of Harvard University points outThe rationale for this is relatively straightforward. With flexible exchange rates, the main mechanism for offsetting a current-account deficit is through the capital account, i.e. net EXPORTS of asset claims. As long as the US has an institutional advantage towards attracting net foreign savings (and thus exporting CLAIMS against US banks, firms and public debt), not only is a current account deficit sustainable, it is almost inevitable.
that America's relatively fast-growing population, secure property
rights and liquid financial markets make it a magnet for global
savings. The share of assets owned by foreigners is still lower than in
some other rich countries, so large trade deficits could plausibly
continue, if not indefinitely, then for many years.