Beware the Weak Dollar.

Byline: Jeffrey E. Garten (Garten is the Juan Trippe Professor of International Trade and Finance at the Yale School of Management.)

So far, serious currency turmoil hasn't been a part of the subprime-induced credit crunch. Nevertheless, the monetary system could be more fragile than it appears. In fact, the way Washington has handled the U.S. dollar these past several years could be part of a future problem.

President George W. Bush has seen a steadily weakening dollar as an answer to its ever-widening current account deficit. After all, the dollar has depreciated about 25 percent against a basket of currencies since 2002 without a peep from Washington. The United States has been pushing relentlessly for China and other Asian countries to revalue their currencies, thereby trying to make the greenback relatively weaker. And we've seen no sign that the United States is ready to broker a more orderly rebalancing of key currencies among major countries.

Indeed, the Bush administration has been relying entirely on a depreciating dollar to increase exports and restrain imports. It has done little to rein in federal spending and tax cuts in order to constrain consumption. It has not encouraged domestic savings in order to reduce the need for massive inflows of foreign funds. It has devoted scant attention to enhancing American competitiveness by addressing such problems as soaring health-care burdens on industry.

It would be one thing if this lopsided policy were working, but the current account has continued to increase from its record-breaking $850 billion last year. The bellwether Chinese global trade surplus is rising, too.

One of Washington's fundamental assumptions about a declining dollar is wrong. As the figures show, just because a cheaper greenback might make imports more expensive, it doesn't mean Americans will significantly cut back on their purchases of foreign goods. Reason: the nation has become hooked on imports, not just for finished products that are no longer made in the United States, such as many machine tools, but also on parts essential for the finished goods themselves, such as the electronic components for computers. Thus, a weak dollar leads not to less imports, but to higher prices and inflation.

In addition, the dollar cannot sink far enough to do what Bush needs without creating a panic. For example, while a softer greenback has benefited exporters, almost no conceivable dollar depreciation ...