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Why the dollar will keep falling

The New York Times reports that the European Central Bank raised its equivalent of the Fed Funds rate to 4.25%. Meanwhile, Bernanke's economic wrecking crew has kept the U.S. rate at 2%. Investors will sell dollars and buy Euros. That will cause the dollar to lose even more of the 72% it's lost since January 2001. But none of this is really happening because AFP reports that President George Bush has declared that "we're strong dollar people."

The key to U.S. policy is repeated denials of the obvious -- which is that U.S. policy is consistently intended to weaken the dollar. The reason is that a weak dollar makes the goods of big U.S. corporate exporters relatively cheap when they sell overseas. And of course, since oil is traded in dollars, a weak one causes the price of oil to spike. It now resides at a comfortable $146 a barrel, up 508% since January 2001.

But Reuters reports that Treasury Secretary Hank Paulson -- who last year brought us "subprime is contained" -- now says that the weak dollar is not to blame for high oil prices. With apologies to the old E.F. Hutton advertisements -- which said "When E.F. Hutton talks, people listen" -- when Hank Paulson talks, people snicker.

Why does Europe see things differently than the U.S.? The answer is complex. But one thing seems clear. The Fed keeps talking about how core inflation -- excluding gasoline and food prices -- is contained. Europe seems to care more about rising prices that people actually pay. Saying "we're strong dollar people" and repeating that "core inflation is contained" don't really make these statements true.

With gasoline prices at a record high and the number of 4th of July drivers down, these statements could lead voters to ask themselves whether it's time for a change.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter.

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DJIA-215.458,376.24
NASDAQ-46.821,445.56
S&P 500-25.52845.22

Last updated: December 05, 2008: 05:52 AM

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