Why I'm A Dollar Bull; Lonely Among the Bears: The relationship between deficits and the dollar is a red herring. And it is virtually impossible for the dollar to collapse when the United States is leading the world to higher interest rates.(Cover Story)

Byline: Gail Fosler (Fosler is chief economist of the Conference Board, a business network and research group in New York.)

The conventional wisdom is that the dollar will decline because the United States has large trade and budget deficits. The conventional wisdom is wrong. When the dollar breaks out of its current range, roughly between $1.30 and $1.35 to the euro, it will strengthen rather than weaken. Given the new momentum-driven dynamics in foreign-exchange markets, the pace of appreciation

could be rapid and the dollar could rise 10 to 15 percent to reach 1.17 by the first quarter of 2006.

Why? First, the relationship between the trade and budget deficits and the dollar is a red herring. Looking back over time, one finds almost every possible combination of trade and budget conditions and dollar values imaginable. In the late 1990s, the United States had budget surpluses and a wildly expanding trade deficit. Yet, the dollar appreciated to all-time highs against the euro.

Second, what made the current combination of trade and budget deficits particularly lethal for the dollar was an almost Japanese-style monetary policy aimed at reflating the global economy. The extremely long period of very low interest rates had the effect of deflating the dollar. Now this policy has reversed and the United States is leading the rest of the world toward higher and higher interest rates. It is virtually impossible for the dollar to collapse under these conditions.

Third, and probably most important, is the fact that global investors, after several years of risk seeking, will become more and more risk averse. This sense that the global economy is something less--possibly a lot less than today's Panglossian world view--favors the U.S. dollar. The Conference Board publishes leading economic indexes for nine countries, including the United States, that collectively make up 60 percent of global GDP. These indexes are signaling a peak in global industrial activity in the first half of 2005 that is likely to be followed by slower growth in the second half of 2005 and 2006.

A global slowdown is healthy for the United States, where labor-market pressures are already intense and the consumer sector is overextended. Investment will continue to be robust; but it is absolutely clear that consumer spending must climb down from atop its perch at 80 percent of GDP.