The dollar will fall further: unless Europe and others take steps to stimulate domestic demand.

• Author: Feldstein, Martin

When the euro's value reached an all-time high of $1.52, Jean-Claude Trichet, the president of the European Central Bank, told the press that he was concerned about its rapid appreciation and wanted to "underline" the United States Treasury's official policy of supporting a strong dollar. Several European finance ministers subsequently echoed a similar theme.

In reality, of course, the United States does not have a dollar policy--other than letting the market determine its value. The U.S. government does not intervene in the foreign exchange market to support the dollar, and the Federal Reserve's monetary policy certainly is not directed toward such a goal. Nor is the Fed specifically aiming to lower the dollar's value. Although cutting the federal funds interest rate from 5.25 percent in the summer of 2007 to 3 percent now contributes to dollar depreciation, this has been aimed at stimulating a weakening economy.

Nevertheless, all U.S. Treasury secretaries, going back at least to Robert Rubin in the Clinton administration, have repeated the mantra that "a strong dollar is good for America" whenever they were asked about the dollar's value. But, while this seems more responsive than "no comment," it says little about the course of current and future U.S. government action.

Indeed, the Treasury's only explicit currency goal now is to press the Chinese to raise the value of the renminbi, thereby reducing the dollar's global trade-weighted average. The pressure on China is, however, entirely consistent with the broader U.S. policy of encouraging countries to allow the financial market to determine their currencies' exchange rate.

There is, of course, truth to the statement that a strong dollar benefits the American public, since it allows Americans to buy foreign products at a lower cost in dollars. But, while the declining dollar does reduce Americans' purchasing power, the magnitude of this effect is not large, because imports account for only about 15 percent of U.S. gross domestic product. A 20 percent dollar depreciation would therefore reduce Americans' purchasing power by only 3 percent. At the same time, the lower dollar makes American products more competitive in global markets, leading to increased exports and reduced imports.

The dollar has declined during the past two years against not only the euro but also against most other currencies, including the Japanese yen and the renminbi. On a real trade-weighted basis, the dollar is...