With Nariman Behravesh, Global Insight

With Nariman Behravesh, Global Insight

Nariman Behravesh is chief global economist and executive vice president of Global Insight, an economic consulting firm based in Lexington, Mass. He is responsible for developing the economic outlook and risk analysis for over 180 countries.

Q. Is the dollar overvalued?

A. Yes, the dollar is still overvalued. It rose to record levels throughout the '90s and has yet to come down to levels that we've seen before. I think it will probably fall by another 10 percent against the euro, where it will have fallen by 50 percent since the start of 2000. That's a 50 percent devaluation from its highest level against the euro - pretty dramatic. But to put that in perspective, you have to remember that the dollar fell by 90 percent against the deutsche mark in the late 1980s.

Q. What impact will the fall of the dollar against the euro have on U.S. imports and exports?

A. It takes a year or two before the impact of a falling currency starts to take hold. That's because fixed-price contracts remain in effect and foreign suppliers may keep their prices low to retain market share. But we're already seeing the overall growth of U.S. imports slowing and the growth of exports picking up. The dollar has been falling against the euro since the start of 2002 and we're only just now seeing the effect of that.

Q. What U.S. exports are benefiting the most from the fall of the dollar?

A. We're starting to see exports improving across the board, but the most dramatic growth has been in agricultural products and some manufactured goods. Services, too, are feeling the impact of the dollar devaluation across the board. We're starting to see a big influx of European tourists. U.S. tourists are finding it's a lot more expensive to travel in Europe.

Q. What impact is the fall of the dollar having against the yen and other Asian currencies?

A. The dollar has declined by about 20 percent against the yen since 2002, less than against the euro, because the Japanese central bank has been far more aggressive in managing its exchange rate. The dollar has only fallen by 5 to 10 percent against other Asian currencies because those countries also manage their exchange rates aggressively.

Q. What impact is this having on trade with Asia?

A. U.S. exports to Japan have risen and imports are slowing. But the biggest impact of the fall of the dollar is on our trade with Third World countries in Africa, Latin America and Southeast Asia, where our goods have become more competitive. For example, Boeing is going to be able to compete much more effectively against Airbus.

Q. Do you think the Chinese government will at some point allow the yuan to float, or will it peg it to a higher range against the dollar?

A. The Chinese government is likely to widen the band around the yuan sometime in the next couple of years. However, the band will remain fairly narrow for the foreseeable future. It is possible that for purely political reasons, they will do this before the U.S. presidential elections next year. However, the impact on trade will be negligible.

Q. How is the fall of the dollar affecting foreign portfolio investment in the U.S.?

A. Foreign portfolio flows are slowing because investors don't want to be caught with the possibility of further currency losses, even though the returns in U.S. securities may be higher than at home. Once the exchange rate stabilizes, we'll see that money come back into U.S. securities.

Q. Foreign portfolio investment has helped finance our deficits in trade and the budget. What impact will the slowdown in foreign investment have on the U.S. economy?

A.T he risk is that it could hurt the stock market. It could also drive down bond prices and push up yields. But there has been very little impact so far. The stock market has been very strong and the bond market has not been hurt. But there could be some adverse effects going forward if the dollar decline continues, which it probably will.

Q. Do you think this will prompt the Federal Reserve to raise interest rates sooner than it otherwise would have?

A. So far the Fed hasn't appeared to be paying much attention to the falling dollar. But with the economy recovering strongly at this point, I think the Fed will probably raise interest rates by about 50 basis points by June. It will do so as a preemptive move against the possibility of any resurgence of inflation, rather than reactively to support the dollar.