A rising dollar is the last thing the world's economic policy-makers need right now if correcting so-called global imbalances is at the top of their agenda. The greenback has notched gains of between 4 percent and 10 percent so far this year despite handwringing over a US international payments deficit set to top 6 percent of national income in 2005.
The Federal Reserve's broadest dollar measure, or its value against a basket of currencies weighted according to their country's share of US external trade, has this year reversed a fifth of its fall from the peaks of 2002.
"The rise of the dollar curtails current account improvements on one hand, but also reflects strong demand for dollar-denominated assets," said Joe Prendergast, head of Global FX Research and Strategy at CSFB. "We may yet have wider deficit and stronger dollar trends ahead."
The prospect of ever-widening US deficits clearly disturbs finance chiefs from the Group of Seven economic powers, meeting again in London this weekend.
They fear the potential disruption should foreigners be unwilling to fund ballooning US deficits. The risk is a precipitous and messy dollar slide.
The "vigorous action" called for by the Group of Seven industrialised countries in its April 5 statement on dealing with global economic imbalances was a wishlist - US budget cuts and higher household savings, more demand in Europe and Japan and flexible currencies in Asia.
A buoyant dollar reduces upward pressure on import prices and helps keep US consumers hooked on overseas products.
At the same time, by both dampening inflation and adding to the allure of Treasury bonds for overseas investors, a higher dollar also keeps long-term borrowing costs low and the public shopping.
Many, including Fed chief Alan Greenspan, hoped the lagged effect of three years of dollar declines was squeezing foreign exporters' profit margins to the point they would raise prices.
In February, Greenspan said: "We may be approaching a point - if we are not already there - at which exporters to the United States, should the dollar decline further, would no longer choose to absorb a further reduction in profit margins."
The dollar has risen since. But the Federal Open Market Committee on May 3 kept up hopes for such an adjustment.
There were some signs of consumers being weaned off imports in March, but April trade data, due on Friday is expected to show the deficit rising back to $58 billion from $55 billion.
Non-oil import price inflation - the annual 3.0 percent gain in April was unchanged from January - holds little hope of aiding a major switch. Gains in imported consumer goods prices, meanwhile, picked up to just 1.1 percent from a low 0.8 percent in January.
An obvious culprit is China, whose yuan currency remains pegged to the US dollar despite intensifying pressure from Washington for Beijing to let it rise.
China accounts for 12 percent of US imports, and yet the price of imports from the booming low-cost economy fell 0.4 percent in the year through April.
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