Baker on dollar decline

Dean Baker defends President Bush:

So who is to blame for the falling dollar in this story? The answer is simple: Robert Rubin and the people who let it become overvalued in the first place. The high dollar of the second Clinton administration produced beneficial short-term effects (at least for people who did not have to compete against imports), but had inevitable long-term costs. We are now experiencing these long-term costs in the form of the decline of the dollar, which will lead to higher inflation and quite likely higher interest rates.

In this particular case, President Bush and his tax cuts are innocent bystanders. If anything, the expected effect of his tax cuts should be to raise the value of the dollar because the resulting budget deficits lead to higher interest rates in the United States.

In short when looking for people to blame for the falling dollar, the spotlight should be focused on the people who gave us the high dollar. It was a story of short-term gain for long-term pain, just like the Bush tax cuts, except the impact of the overvalued dollar is considerably larger.

UPDATE: knzn defends Rubin, arguing that hot air (the ‘strong dollar’ mantra) doesn’t hold much sway in foreign exchange markets.