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The falling dollar THE dollar s tumble this week was attended by predictable shrieks from the markets; but as it fell to a 20 month low of $1.32 against the euro, the only real surprise was that it had not slipped sooner. Indeed, there are good reasons to expect its slide to continue, dragging it below the record low of $1.36 against the euro that it hit in December 2004. The recent decline was triggered by nasty news about the American economy. New figures this week suggested that the housing market s troubles are having a wider impact on the economy. Consumer confidence and durable goods orders both fell more sharply than expected. In contrast, German business confidence has risen to a 15 year high. There are also mounting concerns that central banks in China and elsewhere, which have been piling up dollars assiduously for years, may start selling. Yet cyclical factors only partly explain why the dollar has been strong. At bottom, its attractiveness is based more on structural factors-or, more accurately, on an illusion about structural differences between the American and European economies. The main reason for the dollar s strength has been the widespread belief that the American economy vastly outperformed the world s other rich country economies in recent years. But the figures do not support the hype. Sure, America s GDP growth has been faster than Europe s, but that is mostly because its population has grown more quickly too. Dig deeper and the difference shrinks. Official figures of productivity growth, which should in theory be an important factor driving currency movements, exaggerate America s lead. If the two are measured on a comparable basis, productivity growth over the past decade has been almost the same in the euro area as it has in America. Even more important, the latest figures suggest that, whereas productivity growth is now slowing in America, it is accelerating in the euro zone. | 
