Weaker greenback could help economy, but cause prices to go up
WASHINGTON – The U.S. dollar’s recent fall may prove to be a good thing for the U.S. economy, as long as it doesn’t spiral out of control.
While a weaker dollar alone won’t turn the economy around, it will help stave off deflation and give the ailing economy a small boost. Those benefits would come at a cost, though: somewhat higher prices for American consumers.
The dollar has fallen nearly 25 percent in the past 16 months against a basket of other major currencies such as the euro, the Japanese yen and the Canadian dollar. Market analysts think the decline isn’t over. The euro is trading at about $1.18, up from 86 cents in February 2002. Analysts project the European currency will hit $1.30 sometime next year.
A weaker dollar helps the economy by boosting U.S. exports, because American-made goods become cheaper in foreign currencies. A lower dollar also nudges up prices at home for many imported products, from French wine to German cars. Higher-priced imports push consumers to buy American, though some U.S. firms may raise their prices to take more profit. The end result: more U.S. jobs but higher prices at the checkout counter.
Also, Americans may forgo overseas vacation plans, spending tourism dollars at home. A 200-euro hotel room in Paris now costs $238 a night instead of the $172 it cost early last year.
“The Disneyland workers are happy to see you, but you might have preferred to go to Europe for your vacation,” said Michael Swanson, a Minneapolis-based senior economist for Wells Fargo bank.
To the extent that the falling dollar pushes up prices in the United States, it will help prevent deflation, a widespread decline in prices. Deflation can be harmful, because it can squeeze company profits, leading to wage cuts and layoffs.
The benefit of a lower dollar has its limits, though. While imports and exports are important to some industries, such as steel, their impact is much smaller on the U.S. economy overall.
Economists estimate that the decline in the dollar could add 0.2 to 0.5 percentage points to annual economic growth. While that would help, it wouldn’t be enough to boost growth from 2 percent today to the 4 percent to 5 percent level needed to bring down the unemployment rate.
Also, the dollar hasn’t fallen against the currency that is most important to many U.S. factory workers: the Chinese yuan. China, which has become a major exporter to the United States, keeps its exchange rate fixed at 8.3 yuan to the dollar.
That means the competitive balance between U.S. workers and Chinese workers doesn’t change.
The dollar is falling against other currencies because foreigners are investing less money in the United States. Foreign firms aren’t building factories here or buying into American companies as they did during the late 1990s economic boom. Foreign investment in U.S. stocks has dropped dramatically, and purchases of corporate bonds are off as well.
Recent statements by Bush administration officials are contributing to the dollar’s fall. Two weeks ago, Treasury Secretary John Snow described the dollar’s decline as “a fairly modest realignment of currencies.” Currency traders took that to mean that the U.S. government is less concerned about the dollar’s strength than it has been in the past.
“It sends a signal to foreign investors that the United States is not about to intervene anytime soon to prop up the value of the dollar,” said Jay Bryson, international economist for Wachovia Securities in Charlotte, N.C. “And so it leaves traders free to try to continue to speculate about pushing the dollar lower.”
The danger is that the continuing slide in the dollar could spiral into a free fall. Foreign investors will pull more money out of the United States, causing a further fall in the dollar, which in turn causes a further drop in foreign investment, and so on. The stock market could go into reverse, and the hoped-for economic recovery could peter out. It’s not the most likely scenario, but it can’t be ruled out.
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(c) 2003, Knight Ridder/Tribune Information Services.
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GRAPHIC (from KRT Graphics, 202-383-6064):
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AP-NY-06-01-03 1602EDT
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