Clearly, something must be done to restore deficits to reasonable levels. But there are several promising signs, and reasons to believe a dollar crisis may not be imminent. First, once-languishing markets like China are on a growth trajectory that could spur new demand for U.S. exports. For another, there is continuous excess capacity in post-tech-bubble markets, including IT and especially labor. Although higher energy and commodity prices remain a concern, excess capacity reduces the likelihood of runaway core inflation.

The government is also working to carefully engineer an orderly expansion, and to trim the trade imbalance by gradually reversing its accommodative interest-rate stance. Global monetary policy makers will continue to gradually raise uncommonly low interest rates but they will only have the luxury to do so at a measured pace as long as core inflation does not surprise on the upside.

As for the risk of a near-term shift in overseas competition, not even the U.S.’s most rapidly growing trading partner, China, can handle the massive export demands of a consumption- oriented market like the U.S. It will take some time before such developing markets build the necessary infrastructure to do so. Progress is quickly being made, however, as China has recently received more
direct foreign investment than any other country, including the U.S. Nonetheless, you can be sure the U.S. will take the necessary steps — e.g., bolstering research and development— to retain its position as a leading destination for foreign trade and investment.

The global rivalry for economic growth will increase, and while demand for raw materials will keep
commodity prices firm, the international competition for jobs will continue to tighten differences in the global standard of living.

Given the significant challenges the U.S. faces with respect to global competitiveness, the value of the dollar is tough to predict long term. But barring unforeseen crises, such as another terrorist attack, continued oil price increases, or a seismic stock market shock, normal cyclical forces are in place to deliver moderate U.S. economic growth that should prevent a disorderly softness of the dollar for the coming 18 months.

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