With dollar still sinking, Fed won’t buck the trend
In the Federal Reserve’s battle to keep the U.S. economy from a severe downturn, the beleaguered dollar is getting walloped anew.
That is going to worsen the sticker shock for Americans headed overseas or buying some of their favorite imported goods.
But it also will underpin the current boom in U.S. exports, which has helped to offset some of the economic pain of the housing bust.
The euro currency jumped to a record high against the dollar Wednesday, reaching $1.512 from $1.497 on Tuesday.
Six years ago, 1 euro cost less than 87 cents.
The dollar also fell to its lowest level in years against the Australian dollar, the Swiss franc, the Brazilian real, the Russian ruble and a number of other currencies.
The latest plunge in the buck’s value followed Federal Reserve Chairman Ben S. Bernanke’s testimony on Capitol Hill, where he described the economy as “distinctly less favorable” and all but assured Congress that the central bank would continue to cut short-term interest rates.
To currency traders worldwide, that was a signal to dump the dollar again, deepening what has been a losing trend for the greenback since 2001.
Generally, the weaker a country’s economy is and the lower its interest rates, the weaker its currency gets as some global investors opt to take their money elsewhere -- in the process selling one currency to buy another.
Wall Street appears convinced that the Fed will slash its benchmark rate to 2.5% from 3% when the central bank’s policymakers meet March 18.
By contrast, the European Central Bank has held its key rate at 4% since June and shows no sign of wanting to join the Fed in easing credit. Higher European rates support the euro’s value at the dollar’s expense.
For the Fed, “their first concern is to lessen the damage to the U.S. economy, not to strengthen our currency,” said David Kotok, chairman of investment firm Cumberland Advisors in Vineland, N.J.
Even as the euro surges, some analysts believe it could be nearing a peak.
If the global economy follows the U.S. into a slowdown, Europe’s central bank and others abroad may be forced to follow the Fed in lowering interest rates this year, said Meg Browne, a currency strategist at banking firm Brown Bros. Harriman & Co. in New York.
That could hammer their currencies while bolstering the dollar. The greenback could rebound further if investors believed the U.S. economy would be the first to emerge from a global funk, Browne said.
But in the near term, by letting the dollar sink, the Fed is eroding Americans’ purchasing power and risking higher inflation.
The falling dollar has been no friend to Lonnie Kane, president of Vernon-based Karen Kane Inc., which makes higher-end women’s clothing.
Kane buys much of his fabric from designers in Italy and France, and the rising euro has made those fabrics much more expensive -- while his American customers such as Bloomingdale’s and Nordstrom aren’t willing to accept price hikes.
“Europe is raising prices based on the dollar, and we either have to absorb the price increase or get the hell beat out of us for trying to pass them along,” Kane said. “At some point we see no choice but that apparel prices are going to have to rise.”
Still, American consumers have been largely spared dramatic increases in import prices despite the dollar’s slide over the last six years.
At Fletcher Jones Motorcars in Newport Beach, the biggest Mercedes-Benz dealer in the country, General Manager Garth Blumenthal said Germany-based Mercedes has been holding the line on prices of cars shipped to the U.S., preferring lower profit to the risk of losing sales to other luxury brands.
Germany is one of 15 European nations that have adopted the euro as their currency.
“We’re in an economy that’s fairly tough, and all the manufacturers are fighting for their share of the market,” Blumenthal said. “They’re all doing the same thing: pricing very carefully to maintain their market share and not lose out to competitors.”
Mercedes’ efforts have made Benzes sold in the U.S. a bargain compared with its cars marketed in some other parts of the world, Blumenthal said. Lately, the dealership has been fielding calls from auto brokers in Russia, China and other countries who are seeking to profit from the price differential: They are looking to buy vehicles in the U.S. and ship them back to their home markets.
Of course, even as the shrinking dollar squeezes U.S. importers, it buoys exporters by making their goods less expensive in countries with rising currencies.
U.S. exports surged 12% to a record $1.62 trillion last year, government data show. At the same time, a slowdown in import demand narrowed the U.S. trade deficit -- the difference between the value of imports and exports -- to $712 billion, down 6.2% from 2006 and the biggest percentage decline since 1991.
The dollar’s slide also could bring a new wave of foreign tourists to U.S. shores as their purchasing power grows.
Los Angeles saw a 10% increase in European arrivals through LAX last year compared with 2006, which translated into 50,000 additional visitors and $38 million to $48 million in spending, said Mark Liberman, chief executive of LA Inc., the city’s convention and visitors bureau.
“It’s great news, absolutely great news for us,” Liberman said of the dollar’s renewed slump.
Christine Silvestri, owner of Urban Shopping Adventures, said she saw a 10% to 15% increase in international travelers booking her company in 2007 for shopping tours that included Robertson Boulevard, Melrose Avenue and the downtown fashion district.
“They come to L.A. specifically to shop,” Silvestri said. “They bring lots of money, and they spend from $1,000 to several thousand apiece.”
Longer term, a key risk to the U.S. economy is that foreign investors could tire of seeing their dollar-denominated holdings devalued by the sinking greenback and could shift their assets elsewhere en masse. But warnings that foreign investors could flee the U.S. in huge numbers have been heard frequently since the 1980s. So far, they have not come true.
Although the dollar’s decline reflects a higher regard, and demand, for other currencies by some investors and traders, many market professionals remain sanguine about the long-term appeal of U.S. assets.
“The U.S. is still the best place to invest because it has the deepest, most open markets,” said John McCarthy, director of foreign-exchange trading at ING Financial Markets.
Jay Bryson, a global economist at banking giant Wachovia Corp. in Charlotte, N.C., said European investors who have watched the euro soar from its all-time low of 83 cents in 2000 aren’t likely to be unnerved by its move from $1.46 at the start of the year to the current $1.51.
“If they haven’t dumped the dollar by now, they aren’t going to,” he said.
--
martin.zimmerman@latimes.com
kimi.yoshino@latimes.com
More to Read
