Today the dollar has risen in the currency markets. The ‘psychological boost” of Bush’s tax plan is given as the reason. Before the boosters say that a strong dollar is a vote of confidence in America’s economy, we should consider the more important and immediate message of the rise: that all other things being equal, a reduction in dividend taxes will encourage more foreign ownership of US stocks, which will further capital inflows into the US. The currency markets are simply adjusting on this expectation, not voting on the economy as a whole. In fact, there are reasons to think that exacerbating our capital-accounts and trade deficits is NOT what we need to be doing right now.
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