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After a long slide, dollar on the rebound

A stronger US currency reduces inflation pressures, but American exports could run into head winds.

By Ron SchererStaff writer of The Christian Science Monitor / August 20, 2008

Richard B. Levine/Newscom

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New York

This fall, as customers shop for imported olive oil and pungent French cheeses at Fairway Market's stores in Manhattan, they will be in for a pleasant surprise: Their prices are coming down.

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Lower food prices?

Yes, thanks to a somewhat more muscular dollar, the greenback is up 10 percent compared with other major world currencies in the past month. Some importers, such as Fairway Market, are trying to pass on the savings to customers. The rise of US currency is taking place in large part because the rest of the world is looking at slower growth or, in some cases, even recession.

A more powerful dollar has important implications. It takes some pressure off hedge funds to put money into oil, whose price continues to fall. A stronger dollar reduces some of the inflation pressures, which should give the Federal Reserve the opportunity to keep interest rates where they are.

But a more muscular greenback also means it becomes more expensive for Europeans to buy American condos and beach cottages. And exports of US goods, which have been strong, may run into head winds if the dollar keeps rising.

"The stronger dollar at this point is a net positive," says Scott Anderson, senior economist at Wells Fargo Economics in Minneapolis. "There has been enough depreciation to give us a boost and enough stability to help us on the inflation front."

Before the recent rally, the dollar had fallen about 45 percent from its peak in 2002. The short-term boost means the dollar is now down about 36 percent from that peak.

"If the dollar continues to strengthen, it does open the door for oil prices to move lower," says Jay Bryson, international economist at Wachovia Economics Group in Charlotte, N.C.

On Tuesday morning, the price of oil on the commodities markets fell below $112.50 a barrel, down from a peak $145.85 in early July.

One main reason for the falling price of oil and the rising dollar is the slowing world economy, Mr. Bryson says. For example, the German economy, a powerful engine for Europe, is starting to slow as global investment spending weakens.

"Whereas two months ago some thought the European Central Bank would raise interest rates, now things in Europe are looking pretty shaky," he says. "If anything, interest may be skewered to the downside."

In fact, the Japanese economy appears to already be in recession, says Sung Won Sohn, a professor of economics at California State University, Channel Islands. "Japanese exports are lower than a year ago, and that is the first time that has happened in the [post-World War II] period," Mr. Sohn says. "It tells you how slow the global economy is."