Falling Dollar Makes America Dirt Cheap
Things in the U.S. sure are tough. Brother, can you spare a euro?
Signs saying "We accept euros" are cropping up in the windows of some Manhattan retailers. A Belgium company is trying to gobble up St. Louis-based Anheuser-Busch, the nation's largest brewer and iconic Super Bowl advertiser.
The almighty dollar is mighty no more. It has been declining steadily for six years against other major currencies, undercutting its role as the leading international banking currency. The long slide is fanning inflation at home and playing a major role in the run-up of oil and gasoline prices everywhere.
Vacationing Europeans are finding bargains in the U.S., while Americans in Paris and other world capitals are being clobbered by sky-high tabs for hotels, travel and even sidewalk cafes. Northern border-city Americans who once flocked into Canada for shopping deals are staying home; it's the Canadians flocking here now.
Everything made in America — from goods to entire companies — is near dirt cheap to many foreigners. Meanwhile, American consumers, both those who travel and those who stay at home, are seeing big price increases in energy, food and imported goods. The dollar has lost roughly a quarter of its purchasing power against the currencies of major U.S. trading partners from its peak in 2002.
Since oil is bought and sold in dollars worldwide, the devalued dollar has made the recent surge in energy prices even worse for Americans, leading to $4 gasoline in the United States. Analysts suggest that of the $140 a barrel that oil fetches globally, some $25 may be due to the devalued dollar.
Further declines in the dollar will add to oil's appeal as a commodity to be traded.
Oil, suggests influential energy consultant David Yergin, is "the new gold."
The limp greenback has had one big benefit to the U.S. economy: Since it makes American goods cheaper overseas, it has helped manufacturers who export and other U.S. based companies with international reach. Exports have been one of the few bright spots in an otherwise darkening U.S. economy.
Franklin Vargo, vice president of international economic affairs at the National Association of Manufacturers, welcomes the dollar slide, as do members of his organization.
"We can see that, when the dollar's not overpriced, that people around the world want American goods and our exports are going gangbusters now," he said.
He doesn't see the dollar as undervalued. He sees it as having being overpriced in the 1990s — and what's happened since as something along the lines of a correction. Still, Vargo acknowledges the dollar's decline has brought a measure of pain to some consumers.
"As the dollar has gone down in value, that has added to the dollar cost of oil. No question. So having the dollar decline is not unambiguously a plus. That's why we say there's got to be a balance there somewhere. What we want is a Goldilocks dollar. Not too strong, not too weak. But just right. And only the market can determine that," Vargo said.
Mark Zandi, chief economist at Moody's Economy.com, said expanding exports due to a weak dollar are "an important source of growth, but it doesn't add a lot to jobs, it doesn't mean very much for the average American household.
For the average American, for the average consumer, these are pretty tough times." The loss of the dollar's purchasing power and international respect has some experts worrying that the euro might one day replace the dollar as the so-called primary reserve currency.
And that could trigger a dollar rout as foreign governments and international investors flee from U.S. Treasury bonds and other dollar-denominated investments.
Making matters worse: The gaping U.S. current-account deficit — the amount by which the value of goods, services and investments bought in the U.S. from overseas exceeds the amount the U.S. sells abroad — and the low levels of domestic savings means that foreigners must purchase more than $3 billion every business day to fund the imbalance.
Since roughly half of the nation's nearly $10 trillion national debt is held by foreigners, mostly in Treasury bills and bonds, such a withdrawal could have enormous consequences.
Yet Washington finds its options limited. President Bush asserts longtime support for a "strong" dollar — an assertion he made again last week in a Rose Garden news conference.
"We're strong-dollar people in this administration and have always been for a strong dollar and believe that the relative strengths of our economy will reflect that," he said.
But not once in his presidency has the U.S bought dollars on foreign exchange markets — called intervention — to help prop up the greenback. There's no telling where the buck will stop these days, although for the past few weeks it seems to be in a holding pattern.
Even as three Bush Treasury secretaries in a row spouted the strong-dollar mantra, the dollar kept tumbling against the euro, the pound, the yen, the Canadian dollar and most other major currencies.
The Federal Reserve could prop up the dollar by increasing interest rates under its control. Increased yields would make dollar-denominated investments more attractive to foreigners.
But that could undercut the already anemic economic growth in a frail U.S. economy rocked by soaring fuel costs, falling home prices and rising unemployment — and the lowest reading of consumer confidence in 16 years.
The Fed must do a balancing act between keeping the domestic economy from going into recession and keeping inflation at bay. Furthermore, no Fed likes to raise rates aggressively in a presidential election year. It seems more inclined to hold interest rates low for now to give financial markets time to recover from the housing meltdown and credit crunch.
It did just that in its meeting on June 25, leaving a key short-term rate at 2 percent. The rate reached that level in April after a series of aggressive cuts that brought it down 3.25 percentage points since September. Those cuts helped ease the housing and credit crises — but drove the dollar further down.
In early June, Bush declared before his trip to Europe: "A strong dollar is in our nation's interests. It is in the interests of the global economy."
That, plus a warning by Fed Chairman Ben Bernanke that the dollar's weakness was contributing to U.S. inflation, seemed to temporarily break the dollar's tumble.
Presidents and Fed chairmen don't usually talk directly about the dollar and exchange rates — leaving that up to the Treasury secretary — and international bankers and investors took note of the high-level attention.
Over the past few weeks, the dollar has remained relatively stable, although it took a dip after the Fed decided to leave rates unchanged. The long slide may not be over.
Still, if the Fed moves to lift rates later this year, as some traders and investors anticipate, it could buttress the dollar and spur an exodus of speculators from the oil market — helping to both prop up the dollar and drive down oil prices.
But few economists are sanguine that the economy will improve any time soon. The other main tool to move the dollar — intervention in currency markets by buying dollars and selling other currencies — is risky. It would take great sums of money to make any difference.
The foreign exchange market is the largest in the world, with over $1 trillion traded each day. Seeing the U.S. trying to prop up the greenback by buying dollars could be taken as a sign of desperation and possibly trigger a renewed round of selling.
Furthermore, there has been little encouragement for such a strategy from finance ministers from the Group of Eight wealthy democracies — Japan, Britain, Germany, France, Italy, Canada and Russia plus the U.S. Leaders of the eight countries were to meet in Japan beginning Monday, but the falling dollar was not even on the formal agenda.
It's too touchy an issue, and the dollar's relative stability over the past few weeks makes it easier for world leaders to steer clear.
"People will be talking about it in the corridors," said Reginald Dale, a senior fellow with the Center for Strategic and International Studies.
Treasury Secretary Henry Paulson has suggested that nothing is "off the table" including intervention. But Bush has made statements suggesting he intends to let market forces set exchange rates.
The dollar has fallen so far, it will be difficult to halt or reverse its slide. U.S. efforts to persuade Saudi Arabia and other major oil-producing nations to increase their production — and help ease pressure on both oil prices and the dollar — have brought scant results.
"There's no magic wand," said White House press secretary Dana Perino. "It's not going to be a problem that we solve overnight."
Flood of Foreign Takeovers?
The impact of the falling dollar is not always visible to the average consumer. Not like the big numbers on gas pumps that give stark evidence of price levels. But imported goods, from fuel to cars from Japanese automakers and toys from China — are getting more expensive just as U.S. wages are either stagnant or falling.