Shrinking dollar's mixed blessings
LA Times, September 15th
On his way to Italy this week, John Blount was dreading the message he'd have to give the artisans who make the pasta and tomato sauce his San Francisco company imports to the U.S.
With the dollar hitting yet another record low against the euro in recent days, Blount faces the prospect of paying more than ever for the linguine, bucatini and other goods he buys in Italy.
He could raise prices for his American customers, but at the risk of losing their business. So the entrepreneur will once again lean on his small-town Italian suppliers to give him a break.
"I'm constantly telling the producers, 'It's getting harder to sell -- you have to lower your prices,' " Blount said.
Once the "almighty dollar," the U.S. currency is flirting with a new nickname: the American peso.
Since 2001 the dollar has lost more than half its value against the euro. It now costs nearly $1.40 to buy one euro. But the decline against its major rivals is just the most visible sign of the buck's loss of purchasing power.
In much of the world -- from Brazil to Poland to Thailand -- one dollar buys less than it did a year ago, and far less than it did four years ago. On Friday, the U.S. currency hit a 30-year low against its Canadian peer.
The trend of a falling dollar isn't news to Wall Street or to the ranks of economists. But it was a shock to Katie Ochoa, 20, when she visited a friend in the Provence region of France in May.
Traveling on a budget, Ochoa said she wasn't prepared to find that a piece of pizza and a Coke would cost the equivalent of $8.
"We're supposed to be such a world power," said Ochoa, a student at the University of Redlands. "But our dollar isn't worth anything."
There's rarely a single explanation for why currencies rise and fall, but many experts believe that the sliding dollar is largely a function of the nation's borrowing binge of the last two decades. That has left the U.S. with a yawning trade deficit, and deep in debt to foreigners.
In theory, a currency is supposed to reflect the underlying health of the economy that stands behind it.
"The basic thing is, we have been living beyond our means," said Ted Truman, a senior fellow at the Peterson Institute for International Economics in Washington.
A dwindling dollar is, in effect, the marketplace's attempt to slow those trends, Truman said -- an effort to get Americans to buy less Italian rigatoni, for example, and more of the domestically produced stuff.
The flip side of a weak dollar is that it makes U.S. goods less expensive for foreign buyers, boosting the fortunes of American exporters such as Frank Robinson.
His Torrance company, Robinson Helicopter Co., turns out 800 commercial helicopters a year. And about two-thirds go to foreign buyers.
"We love to see the dollar get as low as possible," Robinson said. That would make the $400,000 price tag of his R44 Raven II copter cheaper for foreign customers.
With the dollar's slump this decade, business has been so good for Robinson that his workforce has more than doubled since 2000, to about 1,200 people now. "We've been selling all we can produce," he said.
The dollar's slide in recent years "has helped U.S. manufacturing tremendously," said Patricia Mears, director of international commercial affairs for the National Assn. of Manufacturers.
"When I talk to our members, many say, 'I'm much more competitive now than a few years ago,' " she said.
The nation shipped a record $137.7 billion worth of goods and services abroad in July, 15% more than in July 2006, government data show.
Even so, Americans' purchases of imports -- including foreign oil -- still far outstrip what U.S. companies export. Imports reached $196.9 billion in July, up 5% from a year earlier.
The gap between imports and exports is the trade deficit. The broadest measure of the U.S. trade picture is the so-called current account, which includes investment flows. The deficit in the current account reached a record $811 billion last year, more than twice what it was as recently as 2001.
This year the deficit has been shrinking modestly, helped by the surge in exports. But the gap remains massive -- another reason, many economists say, that the dollar is likely to keep falling in value.
Officially, the Bush administration, like its predecessors, has said it favors a "strong" U.S. currency. But Treasury Secretary Henry M. Paulson Jr. also has repeated in recent months that the White House believes currency values should be set by the marketplace.
Among economists, the widespread view is that the dollar will keep declining. Some believe, however, that the trend could speed up.
If the dollar loses value too quickly, it could wreak havoc on the economy and financial markets -- driving up interest rates and inflation and slashing Americans' purchasing power, said Peter Schiff, who heads money management firm Euro Pacific Capital in Darien, Conn.
Schiff sees a crucial test looming for the dollar and the economy: When Federal Reserve policymakers meet Tuesday, they are expected to cut their benchmark short-term interest rate, now 5.25%, to ease concerns that the housing market's woes could drag the rest of the economy into recession.
With the dollar in a renewed sinking spell in recent weeks, the danger is that a Fed rate cut could spark a much faster downward spiral in the currency. That could occur if lower interest rates on dollar-denominated bonds caused foreign investors to balk at buying more, or encouraged them to sell U.S. securities and invest their money elsewhere in the world.
Worse, wholesale flight of foreign money from U.S. bonds could drive up long-term interest rates if the Treasury and other debtors have to pay more to attract investors to their securities.
If the Fed were to cut short-term rates but long-term rates rose, "that would be a really unpleasant scenario for the housing market," said Brad Setser, head of global research at Roubini Global Economics in New York.
But predictions of a dollar meltdown have been common fare on Wall Street since the late 1980s. They have yet to come true.
In part, that reflects the reality of global finances. Asia and the Middle East are swimming in dollars they take in from their exports. That money has to be invested somewhere, and the U.S. -- still viewed as the world's most stable big democracy -- remains a prime destination.
"The world has excess savings and doesn't know what to do with it," said Marc Chandler, head of foreign currency strategy at investment firm Brown Bros. Harriman in New York.
Foreigners' willingness to finance U.S. consumption also is self-serving: By helping to keep America spending, China and other exporters underwrite a huge market for their own goods.
Schiff, however, contends that that era is coming to an end, because the rise of many developing economies is creating a burgeoning marketplace for goods and services outside the U.S. He sees a dramatic decline in the dollar in the next few years because he believes the U.S. will lose its investment appeal.
Many economists have a more sanguine view. They expect the trend to be more of the same: a gradual weakening of the dollar that will further shrink the trade deficit, as imports become more expensive for Americans and U.S. goods become more competitive abroad.
But Setser agrees that a gradual adjustment will depend on China, Russia, South Korea and other up-and-coming economies staying heavily invested in dollar-denominated debt and other U.S. securities.
The big uncertainty, he said, is whether at some point the risk of financing the U.S. economy "becomes too much even for them."