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| Falling: A US dollar and euros. The value of the dollar has dropped to a level not seen since 1997. Michael Probst/AP |
How the falling dollar affects Americans
US consumers' standard of living may drop as they pay more for foreign goods, but demand for American labor will rise, say economists.
from the September 24, 2007 edition
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However, some other economists aren't sure a falling dollar will help improve the trade deficit. They argue that the two major components of the trade deficit – oil and imports from China – are not really affected by the dollar gyrations. In July, the two areas represented 80 percent of America's trade imbalance.
"If you can't adjust imports of oil, and most are priced in dollars, and you can't adjust currencies against Chinese yuan, which is pegged to the dollar, depreciating the dollar does not get you where you want to go," says Peter Morici, an economics professor at the University of Maryland's business school.
Mr. Zandi, however, counters that the rising price of oil will eventually mean that Americans get serious about alternatives or cutting down on consumption. "It's having an impact, but it's just not as noticeable yet," he says.
He believes China's slow appreciation of its currency – about 10 percent in the past two years – will ultimately result in fewer Chinese exports. "It will have a big impact two to four years down the road," he predicts.
Some Federal Reserve watchers are not surprised that chairman Ben Bernanke opted to lower interest rates. Mr. Bernanke is a keen observer of the Great Depression in the 1930s. "In his studies of the Depression, one of his main criticisms is that the US was on the gold standard and did not get off of it," says Axel Merk, president of Merk Hard Currency Fund in Palo Alto, Calif. "Had they been able to lower the value of the dollar, Bernanke argues, "the officials could have reduced the hardship."
Some investors, including Mr. Merk, are skeptical that sacrificing the dollar is beneficial to an individual's pocketbook. Globally, that skepticism has seeped over into the gold market and is one reason the price of gold is now above $732 a troy ounce, a 27-year high. So far this year, gold is up about 15 percent.
"Gold appreciates as the dollar declines," says Merk.
So far the weak dollar has not kept investors from buying stocks, bonds, and real estate. The Dow Jones Industrial Average is up about 10.5 percent year-to-date and the Standard & Poor's 500 index is up 7.1 percent year-to-date.
"You could argue it's a problem if there is a rout of the dollar and it affects stock prices," says Zandi. "But we are not there yet, and as long as the decline is orderly, it is one of the key conduits which helps ease the problem."
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