Last autumn, there was heightened speculation that the US dollar would face another period of devaluation. The argument focused on the US current account deficit, which amounted to 5.7 per cent of US gross domestic product in 2004. This level is widely regarded as unsustainable. Economic models suggest that a sustainable current account deficit would imply a fall in the exchange rate in the long run.
The Europeans would have taken most of the brunt of a further dollar devaluation. Fortunately for them, the euro/dollar exchange rate has been relatively stable since last November at a little over $1.30. Of course, the big adjustment could still happen. Those who predicted it wisely acknowledged that they had no idea when it would happen.
