Currency Mess Boosts Dollar, May Benefit U.S. Economy : Markets: A gradual rise in the greenback as investors seek a safe haven could help many Americans, including American tourists and importers.
When Wido Schaefer packs for his two-week trip to Europe next month, he may leave a little extra room for souvenirs.
That’s because the weak-kneed dollar has suddenly found its feet and rallied in recent days, thanks to the discombobulation in European currency markets. If the trend continues, U.S. tourists such as Schaefer will find that trips to Europe suddenly are cheaper.
“If it ends up costing me 5%, 6% or 7% less, I’ll be happy. But I’m still prepared for the $5 cup of coffee,” said Schaefer, owner of the Travel Store, a travel agency in Brentwood.
The dollar, which has been losing ground for months against many European currencies, has benefited from the European currency mess, rising 8% from its all-time lows versus the German mark earlier this month.
That is a good thing for many, including American tourists and U.S. importers of foreign products, who have been hurt by the dollar’s weak performance compared to many European currencies.
Indeed, a strengthening dollar on balance is expected to be beneficial to the U.S. economy, many experts say. It will help reduce inflation by reducing prices of goods imported to the United States. It could give the Federal Reserve greater latitude to lower U.S. interest rates to stimulate the economy, because lower rates tend to depress the dollar.
Also, a stronger dollar could help the nation attract foreign investment because it generally reflects a strengthening economy that investors have confidence in.
A stronger dollar does have drawbacks. It would pinch U.S. exports by making American goods more expensive overseas. Growing exports have been a rare bright spot during the economic downturn; if exporters were severely crunched, then the recovery could be slowed.
But a major crunch in exports is considered unlikely, in part because U.S. goods already are so cheap overseas with the dollar so weak for so long. Also, many big U.S. exporters--and their customers--are hedged to minimize the impact of drastic currency movements.
In addition, any easing in U.S. interest rates made easier by a stronger dollar in turn could provide more flexibility for European central banks to cut their interest rates. That in turn could stimulate their economies--thus boosting demand for U.S. goods.
Sluggish economies in much of Europe have contributed to a decline in U.S. exports, as shown in figures released Thursday by the Commerce Department.
Many economists expect the dollar to continue to gain strength even after the European currency markets calm down because the U.S. economy will be improving, and a strong economy would help exporters and importers alike.
For now, the dollar’s modest comeback is looking pretty good, economists say.
“We are seeing investors going to the dollar and dollar assets for safety. Although we have our problems, many investors still think that the United States is the Rock of Gibraltar,” said Sung Won Sohn, chief economist for Norwest Corp., a Minneapolis-based financial services firm.
Sohn said he expects some short-term volatility in the value of the dollar, but added that “once we get over this turbulence, the dollar should strengthen. The reason is, hopefully, the U.S. economic growth should pick up a bit of steam in the next six months to a year.”
At the same time, European economies are slowing down.
“The current misalignment (of European currencies) is sending a signal and that signal is all is not right in (their) economies,” said Larry Hunter, chief economist of the U.S. Chamber of Commerce.
Economist Lynn Reaser at First Interstate Bank said she expects the dollar to become stronger as the U.S. economy recovers and European economies turn sluggish. But not to the extent that U.S. products will become unaffordable, she added. “I don’t think the dollar will be rising to levels that will hurt our ability to compete abroad,” she said.
Sohn noted that an increasing portion of U.S. exports are to countries that are not affected by Europe’s currency problems, particularly countries in Latin America and the Far East.
A Stronger Dollar: Good for Economy?
The dollar stands to benefit from the European currency crisis, and indeed has rallied sharply in recent days. But is the rising dollar a good development for the U.S. economy and Americans in general? A look at some pros and cons:
A stronger dollar:
* Helps reduce inflation by reducing the prices of goods imported to the United States.
* Helps U.S. tourists traveling overseas by giving them greater purchasing power with their dollars.
* Gives the U.S. Federal Reserve greater latitude to lower interest rates to stimulate the economy, because lower rates tend to depress the dollar.
* Helps the nation attract foreign investment because it generally reflects a strengthening economy that investors have confidence in.
A weaker dollar:
* Helps U.S. exporters by making their products cheaper overseas.
* Makes the United States more attractive to foreign tourists, who spend money here.
* Raises the price of imported goods in the United States, thus making domestic goods more competitive.
* DOLLAR DROPS
The dollar slipped against most currencies in trading Thursday, while stock prices eased in a session clouded by uncertainty over the currency crisis. Main story, A1. Related story, D4
