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Climbing debt casts doubt on dollar's future

Job No. 1 for new Treasury chief: Avoid a 'hard landing.'

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The buck starts here: As Henry Paulson gets ready to take the helm as US Treasury secretary, a single dollar is worth about 116 Japanese yen, 8 Chinese yuan, and 0.79 European euros. Amid predictions that its value could decline by 25 percent or more, where the US currency goes from here will be a major concern of his tenure.

The issue will help shape the direction of US interest rates, the price of goods in stores, and the health of the world economy.

Many economists believe the dollar will decline in value – and needs to decline – rela- tive to other currencies. The reason: The record US trade deficit shows no signs of shrinking on its own accord. The larger it grows, the greater the risk of a "hard landing" for America if other nations become worried about America's ability to repay foreign creditors, who are now lending some $1.6 million per minute to finance overall US spending.

The hard landing scenario, which could spark a global recession, remains a possibility rather than a consensus forecast. But policymakers worldwide, from finance ministers to the International Monetary Fund (IMF), take the threat seriously.

"The thing that's driving the international focus is the concern that the adjustment [in the dollar] could easily be disorderly and really painful," says Charles McMillion, president of MBG Information Services, an economic consulting firm in Washington. "This imbalance will dominate Paulson's and [Federal Reserve Chairman Ben] Bernanke's efforts, for the rest of their terms."

Mr. Paulson, who was confirmed by the Senate last week, is expected to be sworn in any day to a job that includes being official spokesman on the dollar's value.

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