U.S. Lobbying G7 to Prop Up Dollar

It looks like Henry Paulson and other members of the Bush administration are finally beginning to realize that the falling dollar may be a problem:

The Bush administration is leading the international effort to put a floor under the falling dollar.

The conventional wisdom holds that the Europeans, worried that the mighty euro is making their companies less competitive, prodded Treasury Secretary Henry Paulson and other group of seven finance ministers last month into signaling their joint disapproval of the dollar’s plunge. Canada has also been troubled by the strong loonie.

But a senior U.S. Treasury official says that the move actually came at the behest of the American side.

The problem with the dollar is not a speculative artifact, it is a result of two things, that the dollar is objectively overvalued when one looks at the fundamentals of the American economy, and that the Euro has become a reasonable alternative as a reserve currency.

The dollar will continue to trend down until some sort of equilibrium is reached in the best case.

More likely, we will see a stampede of the speculators and a significant downside overshoot.