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| From Japan: Shigeru Mushiaki and Kiyoshi Muraoka (r.) said a weak dollar allows them to spend more in Boston. mark thomson |
Signs the U.S. dollar free fall is ending
The greenback has bounced back a bit after hitting a record low against the euro last week.
By Mark Trumbull | Staff writer of The Christian Science Monitorfrom the March 26, 2008 edition
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The great decline of the US dollar may not be over, but a slowing in the past week does hint at some limits to the free fall.
If the value of the dollar stabilizes, it would be welcome news for Americans worried about inflation – that their money isn't going as far when purchasing imported green grapes or gasoline. It would also offer comfort to other nations that are having a harder time selling exports to US consumers.
Since 2002, the dollar has been on a downward track. It's now at or near 35-year lows as measured by some indexes that represent baskets of other currencies. Last week, the dollar hit a record low against the euro, with $1.59 required to buy each unit of the European Union's currency.
In recent days, though, some signs of a dollar panic have abated. The greenback bounced back a bit against the euro. The price of gold – a metal seen as a haven in times of dollar distress – has plunged since mid-March.
What changed? The Federal Reserve indicated renewed vigilance against inflation, for one. The Fed's recent actions to shore up financial markets, too, seem to have calmed fears of chaos. On the heels of those steps, currency traders may have started wondering if their bearish bets against the greenback are running out of steam.
"I don't see a lot of downward pressures" continuing, says Nariman Behravesh, chief economist at Global Insight, an economic forecasting firm in Lexington, Mass. "Assuming that the economy recovers … we will not be looking at a dollar that will continue to weaken."
That forecast looks out over several years, but in the near term it's possible the greenback could set new record lows.
On Tuesday, for instance, news of declining US consumer confidence was one factor driving the dollar down against the euro, but in morning trading the value stood at about $1.56, still a bit stronger than last week's lows.
A weakening dollar can be a mixed blessing for the US and its trading partners.
To many economists, the strength of the dollar is a gauge of confidence in the US economy. And when the value of the dollar rises, it makes it easier for Americans to buy everything from oil to vacations in Europe.
"With the dollar rising all of a sudden, and commodity prices plunging, this would be a great time for the Treasury to get out there and buy dollars," New York economist Lawrence Kudlow wrote to clients last week. "Send a clear statement that the U.S. wants a stronger dollar. It would do a lot to reduce inflation expectations. And it would drive gold prices down $200 from here."
But many other economists, while they don't necessarily want the dollar to keep plunging, see a positive side to its recent weakness.
By making it cheaper for American companies to export goods, and harder for American consumers to import, it's serving to recalibrate a global economy that had grown too dependent on a US spending spree.
"The reality is that a weak dollar is doing a lot more good than harm to the US economy," Mr. Behravesh says.
Over the past year, for instance, the mammoth US trade deficit – the amount by which imports exceed exports – has begun to narrow. Such imbalances are not always a problem, but the US trade gap has been particularly large and persistent.
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