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US dollar may fall significantly on recovery

22 May 2009 09:39 (UTC +04:00)

Baku. Vahab Rzayev â€“ APA-Economics. The global economyâ€™s â€œfree fallâ€ may have ended, which could in turn hurt the U.S. dollar, Nobel Prize-winning economist Paul Krugman said, Bloomberg reported.

The world economy is projected to shrink 1.3 percent this year, the International Monetary Fund said in April, reversing a previous forecast of 0.5 percent growth. Still, confidence in the global economy has jumped to the highest level in 19 months, based on a Bloomberg survey last week.

Interest-rate cuts by the U.S. Federal Reserve, moves by the Fed to buy assets such as mortgage-backed securities, and government stimulus spending have eased the crisis, Krugman told a seminar today in Ho Chi Minh City, Vietnam. The American economy may expand â€œslightlyâ€ in the second half, he said, citing a slowdown in the pace at which jobs are being lost.

â€œJust about all of the economic indicators out there are suggesting that the free-fall has come to an end, that weâ€™ve stabilized,â€ said Krugman, an economics professor at Princeton University in New Jersey. â€œProbably the worst in terms of shocks to the system is over.â€

Measures of stress in financial markets have eased, Krugman told todayâ€™s seminar.

â€œThe acute stress that we had last fall after the failure of Lehman has been reduced,â€ he said. â€œInterest-rate spreads on commercial paper are way down, interest-rate spreads on corporate debt are down a little bit. The spread on interbank lending is down.â€
Global purchasing managersâ€™ indices have improved, as have industrial production figures in the U.S. and freight-loading figures at major ports, Krugman said.
â€œAll of the indicators are telling the same story,â€ he said. â€œThings are getting worse, but theyâ€™re getting worse more slowly.â€
While the first year of the current global economic crisis resembles the first year of the Great Depression, further declines along the lines of the 1930s-era financial collapse are unlikely, Krugman said.

â€œI donâ€™t think weâ€™ve hit bottom, but the bottom is not too much further below us,â€ he said. â€œMy big concern is that we donâ€™t hit the bottom and bounce, we hit the bottom and stay there. Itâ€™s not obvious where recovery comes from.â€

A global economic stabilization may hurt the U.S. dollar, as will external American deficits, Krugman said.

â€œThe U.S. dollar is going to fall quite a lot, or at least significantly,â€ he said. â€œThe demand for dollars has been temporarily inflated by the crisis. Good news is actually bad news for the dollar. If things stabilize, then the safe-haven demand for dollars falls off.â€

Chinaâ€™s government in March suggested the creation of a new international reserve currency to replace the dollar.

â€œI view the Chinese agitation about a new currency as basically an attempt to have somebody rescue them from their own investment decision,â€ Krugman said. â€œChina bought too many dollars. Now itâ€™s looking at it and saying, â€˜weâ€™re going to lose a lot of money on this investmentâ€™.â€