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U.S.: Sliding Dollar Pinches Ex-Soviet Middle Class

(Courtesy Photo) WASHINGTON, May 19, 2006 (RFE/RL) -- The U.S. dollar has fallen almost 8 percent against the euro since the beginning of April -- and it could fall further, with analysts suggesting that the world's finance ministers have decided to let the dollar's value slip in order to reduce the large trade imbalances between a number of major countries, such as the United States and China. RFE/RL correspondent Julie A. Corwin spoke to Anders Aslund, a senior fellow at the Institute for International Economics, about the dollar's likely future course and the consequences of a cheaper dollar for the countries of the former Soviet Union.

RFE/RL: Could you help us understand what's driving the dollar's slide against the euro? Is the administration of U.S. President George Bush trying to close America's trade deficit by realigning world currencies and make U.S. exports cheaper abroad?

Anders Aslund: This is official policy that the assistant secretary of treasury for international affairs [Clay Lowery] has been pronouncing in order to correct a major current account deficit as the U.S. now has. You need to let the dollar float downwards. And I think that there is general acceptance of that. If you look at it, U.S. imports today are 32 percent of GDP [gross domestic product] while exports are 25 percent of GDP. This can't go on. Something needs to change, and the thing that can change is the exchange rate.

RFE/RL: Doesn't the administration have to be careful not to let the dollar rate plunge too far?

Aslund: This is a free market, so they are not intervening in the market by anything other than public statements. There is a substantial expectation that the dollar exchange rate will fall further -- much more. But on the other hand, last year there was the same expectation, and it didn't happen. That was probably an effect of petrodollars coming to the United States to a greater extent than expected.

RFE/RL: What impact will the dollar's slide have on the economies of Eastern Europe, specifically Russia, Ukraine, and Belarus?

Aslund: You have three things that are directly impacted. One is the effect on commodity prices [expressed] in dollars, and -- to the extent that commodity price contracts are fixed -- that means that Russia receives comparatively less for its commodity exports than otherwise would be the case.

RFE/RL: So commodity contracts, such as for the delivery of oil and gas, are priced in dollars?

Aslund: If you take all the gas deliveries that are priced in dollars for one year or more, [then] this somewhat reduces the enormous windfall gain of Russia. The second effect is that people have their savings in dollars, and this is hurting the middle class. So the middle class feels very upset about their savings being undermined not only by high inflation but also by the falling dollar.

RFE/RL: And the third impact?

Aslund: And the third thing is that quite a few salaries are fixed in dollars. Those need to be changed. These are private sector salaries, so people are suffering. So the middle class is being hurt. I think that is the biggest effect by losing savings and by losing wages.

RFE/RL: Will the longer-term consequence be a shift toward the euro? Will the Russians start denominating their energy sales in euros?

Aslund: That's a big question. The Russians have been talking about that publicly from time to time, partly in order to annoy the Americans, partly in order to, so-to-say, 'index' their exports -- most importantly -- because they are importing primarily from the euro area, while they're exporting in dollar-denominated goods, which doesn't make much sense.

RFE/RL: What about in Central Asia? How are those countries being affected by the dollar's slide?

Aslund: They trade very little with Europe. For Kazakhstan, it would have some impact, but not much. Turkmenistan, certainly. Turkmenistan essentially lives on gas and its price is fixed in dollars -- but prices have gone up so much in any case.

RFE/RL: Are you expecting any decisions or announcements regarding exchange rates to come out of the upcoming summit of the Group of Eight (G8) leading industrialized states in July?

Aslund: I think there's pretty much now a consensus. The start of the current changes in exchange rates were -- there were two starting signals. One was the IMF meeting here [in Washington on April 21]] of the G7 [the G8 without Russia], saying that there should be greater flexibility in exchange rates. The other was [Federal Reserve Chairman Ben] Bernanke's statement in connection with the latest [Federal Reserve] meeting [on May 10], which suggested that there wouldn't be many more increases in the interest rate. [Note: The dollar's exchange rate tends to rise when traders expect that an interest rate hike is coming.]

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