Reply #1: From Morgan Stanley

[mhr]

http://www.morganstanley.com/GEFdata/digests/20030922-mon.html#anchor0

Global: Breakthrough

Stephen Roach (New York)
Morgan Stanley
Sept 22, 2003

An unbalanced global economy has finally come to its senses. At the just-concluded G-7 meetings in Dubai, the world’s major industrial economies have endorsed the basic premise of global rebalancing -- a long overdue adjustment in the dollar. This could well have profound and lasting implications for the world economy. It is an unequivocally positive development, in my view.

Policy statements are always clouded with ambiguity. That’s true of central bank policy directives, as well as communiqués released after G-7 meetings. But for me, the communiqué from the 20 September G-7 meeting in Dubai was crystal clear. Three words said it all -- “flexibility” and “market mechanisms.” G-7 finance ministers have finally conceded that “…more flexibility in exchange rates is desirable for major countries or economic areas to promote smooth and widespread adjustments in the international financial system, based on market mechanisms.” In plain English this means that the perils of external imbalances -- massive deficits in America and surpluses in Asia and, to a lesser extent, Europe -- are now center stage. Market-driven currency adjustments are seen as the means to correct these potentially destabilizing external balances. This is a thinly veiled message to the Japanese, suggesting they cease and desist from their campaign of currency manipulation. It also puts other nations on notice who have been pegging their exchange rates -- especially China and its neighbors in Asia -- that there is no escaping the endgame of market-based principles of currency flexibility. But the essence of the message is that an unbalanced world now needs a weaker US dollar.

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History tells us that the US dollar has only just begun its downward descent. On a broad trade-weighted basis, the dollar (in real terms) has fallen about 8% from its early 2001 highs. In a full-blown current account adjustment, a drop of around three times that magnitude can be expected -- not all that different than the 30% real deprecation of the dollar that occurred in the late 1980s when the current-account disequilibrium was far less acute. In the end, a lopsided world has no choice other than to accede to a weaker dollar. The G-7’sDubai communiqué now puts the major economies of the world on the same page with respect to the global rebalancing that such a currency realignment can trigger. The road ahead will be long and arduous -- and not without risk, especially in oft-volatile currency markets.

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