Low interest rates and growing U.S. deficits pose obstacles for overseas manufacturers.

By NELSON D. SCHWARTZ - PARIS


ONE OF THE most ominous effects of the global downturn is that many foreign central banks are rethinking the dollar’s status as the world’s premier reserve currency, experts are saying. That, in addition to domestic factors like historically low United States interest rates and a ballooning federal budget deficit, are worsening the dollar’s downward movement.

Over the long term, a weaker dollar could narrow the long-running United States trade deficit, helping close the gap between exports and imports, as American products become more affordable overseas.

But for those trying to export goods into the United States, such as as Italian suits, French wines, Japanese electronics and Argentine beef, it makes doing business more difficult as their wares become more expensive to Americans. The dollar’s drop is a central factor in oil’s recent rise back above $75 a barrel, which will mean higher gasoline prices.

But there is another upside, at least for Americans: a weak dollar could prove beneficial to the American economy by aiding long-suffering manufacturers, rebuilding a stronger industrial base and lifting exports even if it makes life harder for trading partners around the world, especially in Europe.

“As long as it doesn’t crash, a gradual, orderly decline is healthy, said C. Fred Bergsten, director of the Peterson Institute for International Economics. “The dollar went up 40 percent between 1995 and 2002, so this is a necessary rebalancing. Nevertheless, this has been the dollar’s fastest drop in six years; in recent weeks the dollar has neared $1.50 against the euro, compared with $1.25 in March. The pound has edged up against the dollar as well, from $1.41 in April to $1.64 this past week.

The political argument in America over the dollar’s trajectory is accompanied by a fierce debate among economists. “Dollar weakness is a major problem for American jobs and living standards, said David Malpass, a Wall Street economist and outspoken critic of the dollar’s decline.

“As the dollar devalues, we have less capital and purchasing power compared to the rest of the world, and there is an increasing risk of higher interest rates and inflation, Mr. Malpass said.

But Mr. Bergsten argues the dollar is only now getting back to a fair valuation against other currencies if the United States is to continue to close its trade gap.

With the recent drop, he said, the dollar is fairly valued against the euro but needs to ease 10 percent against Asian currencies like the Japanese yen to create a level playing field for American business. And for all the fluctuations against the dollar by major currencies, the dollar has not moved at all recently against the Chinese renminbi, which is managed by Beijing in ways that allow Chinese exporters to enjoy a weaker currency and gain market share worldwide.

The Treasury secretary, Timothy F. Geithner, has consistently said the administration favors a strong dollar, but currency markets focus on the unlikely prospect of concrete action, like an interest rate increase.

“The Obama administration may say they want a strong dollar, said Neil Mellor, a currency strategist at BNY Mellon Global Markets in London. “But everyone knows they haven’t got the means to support it. The Federal Reserve can’t raise rates, and the White House can’t cut the budget deficit anytime soon.

If the dollar does keep falling and the euro keeps rising, it could increase trade tensions with Europe, especially big exporters like Germany, which have already been hard hit by the global economic slump.

“The strength of the euro is coming at absolutely the wrong time, said Jens Nagel, head of the international department of the German Exporters Association in Berlin. “The U.S. is our biggest trading partner after the European Union, and it’s a big blow to the recovery of auto companies and industrial exporters.

Mr. Mellor predicts the dollar will keep dropping, reaching $1.60 against the euro by early next year.

As the global economy recovers and international manufacturers ramp up output, they are giving priority to their more competitive plants, including those in the United States, said Pierre Dufour, senior executive vice president at Air Liquide, a French supplier of industrial gases to steelmakers, semiconductor firms, and other industrial giants worldwide.

“It has two sides, like it always does, said Carl Martin Welcker, owner of a machine tools maker, Schutte, in Cologne, Germany. “On the one hand, it makes our machines significantly more expensive, said Mr. Welcker, whose equipment churns out 80 percent of the world’s spark plugs.

“On the other hand, we’re seeing international companies move production back to the U.S., which helps our sales there.



PHILIP SCOTT ANDREWS/ASSOCIATED PRESS / The dollar’s slide hurts companies trying to export goods into the U.S. Shipping containers at the Port of Long Beach, in California.