Currency valuation should be market-based

Who benefits from the falling dollar? Unfortunately, not as nearly as many firms or workers as one might think. The U.S. trade deficit is not going to improve, or at least improve enough, to give American workers a decent job market until the yuan's peg to the dollar is unhinged.

The real winner in the "U.S. vs. them" currency sweepstakes is China. With an already undervalued peg to the dollar, its products are even more competitive in Europe, because the yuan falls against the euro as the dollar falls against the euro. The Europeans will buy more Chinese goods or resort to protection. If I were a betting man, I'd give 2-to-1 odds on European protection, but it won't be transparent. The lawyers will do well on that.

Another interesting twist: Since January 2002, the yen is up against the dollar 20 percent and the euro is up 38 percent; hence, the yen is down against the euro 18 percent. Look for Toyota's European assault to pick up steam or become very profitable or both. European car companies have high labor costs, silly work rules, elements of state ownership, sloppy accounting, lethargic management and feudal governance. Kind of like Rome around 400 AD.

Continental European thinking on economics and foreign policy seems to boil down to: America creates all the problems, and America creates nothing but problems as long as Bush is in the White House. They need to get over it. Their situation will never get better until they clean up their regulatory morass, and the yuan and yen reflect their true market values.

The bottom line: Fixing social security and tort reform are nice but nothing the president could do would matter more to the welfare of American families than accomplishing a market-driven regime for currencies. The Europeans should stop whining and join the Americans in accomplishing that end.

Peter Morici


Robert H.Smith School of Business

University of Maryland

College Park, Md.