Weakening Dollar Will Help Economy More Than Any Bush Stimulus Plan
Whether President Bush’s just-announced proposal to spur the nation’s economy really will be a boon is far from certain. But this much is clear: The economy is poised to get a nice assist from something not part of the White House plan -- the swooning
dollar.
It may sound paradoxical that a weakened currency can make for a stronger economy, but that’s precisely the prospect.
In the classic sense, a lower-valued dollar stands to increase exports by making goods and services produced in the U.S. cheaper to overseas buyers. That, in turn, should help buoy the labor market here.
Corporate profits also stand to benefit. U.S. companies operating globally by and large favor a weaker dollar because they can improve their bottom lines through currency conversions. “If we book revenues overseas in euros,” explains Noel Watson, chief executive of Pasadena-based Jacobs Engineering Co., “we get a boost in profits when we translate those revenues into dollars on our books.”
But the dollar’s fall represents much more than just a currency-exchange game; it speaks, above all, to a potentially profound shift in the world economy.
“One reason U.S. companies have had to continually cut their prices and trim their workforces in recent years was that they were under severe price pressure from overseas competitors,” says economist James Paulsen of Wells Fargo & Co. “Now, some of those pressures will be relieved.”
In other words, European and Japanese firms will have to hustle to overcome the effects of their stronger currencies.
The dollar rose a bit Tuesday as international traders reacted to Bush’s plan. But it has declined almost constantly recently and has been weak since April. It now takes more than $1.04 to equal a euro, whereas seven months ago it took 88 cents. That’s a change of almost 20%. The dollar has tumbled 10% against the Japanese yen over the same period.
And the dollar’s drop shows little sign of reversing. Christopher Orndorff, who manages currency risk for the Los Angeles investment firm Payden & Rygel, believes that the dollar will dip an additional 10% this year to about $1.14 to the euro. Many other experts concur.
Such currency adjustments happen infrequently, but when they do, they tend to set a pattern for five to 10 years.
A dramatic transformation occurred, for example, in the mid-1980s, when Treasury Secretary James A. Baker III engineered a decline of the dollar against the Japanese yen and the German mark. Baker did so to relieve competitive pressure on U.S. farmers, who were having difficulty selling their crops overseas, and major U.S. industrial companies such as Caterpillar Inc., which was locked in a cutthroat battle with foreign rivals.
U.S. companies became competitive in the world once again as the dollar fell against the yen and other currencies and then remained weak for a decade. Japan’s economy, meanwhile, started to go into a long slumber starting in the late 1980s.
Not that currency values can be determined by government fiat. Since the early 1970s, when the U.S. abandoned a system of fixed exchange rates among currencies, values have “floated.” Enormous international markets, influenced by all sorts of judgments and equations, now trade trillions of dollars’ worth of legal tender 24 hours a day.
Beginning in the mid-1990s, the dollar’s strength gained and the U.S. -- whose economy is huge compared with that of Japan or the European Union -- imported far more goods and services than it sold to other countries. In fact, the U.S. trade deficit runs at about $400 billion annually.
Until recently, foreigners reinvested most of that $400 billion back in U.S. government and corporate bonds and in U.S. stocks and real estate. But in the last year, the flows of such investments have tailed off, reflecting the view that U.S. securities haven’t offered the most attractive rates of return. As less foreign money has poured in, the dollar has slid.
Of course, a drooping dollar isn’t a panacea, and, as in many things, moderation is advisable. A total free fall of the greenback would unsettle international markets and, in the extreme, trigger a worldwide depression.
Even if things don’t come to that, the weaker dollar will drive inflation up a bit, hitting consumers with higher prices for the $1.4 trillion worth of goods and services the U.S. imports each year. Vacations in Italy and Spain, which have seemed so reasonable in recent years, will get more expensive too. A slumping dollar “will lower consumers’ standard of living slightly,” says economist Mickey D. Levy of Banc of America Securities.
But in the aggregate, the trend promises more good than harm.
U.S. farmers, who exported $49 billion worth of wheat, chicken, oranges and other produce last year, will enjoy more receptive foreign markets. Manufacturers such as DuPont Co., which exports $4.6 billion worth of chemicals annually, will likewise find more favorable conditions abroad.
Locally, the movie and television industry could make more films in Southern California if the U.S. currency’s slide against the Canadian dollar -- so far only 3% since May -- accelerates.
In the end, analysts estimate, the decline in the dollar could add an extra 1% of growth to the U.S. economy this year. That’s enough to generate more than 3 million jobs. President Bush’s plan, for all its fanfare, wouldn’t come close to doing that.
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James Flanigan can be reached at jim.flanigan
@latimes.com.
