Sliding dollar could give boost to U.S. economy

By Eileen Alt Powell, The Associated Press
Tuesday July 09, 2002

NEW YORK — After five years of high flying, the dollar has begun weakening. That’s not necessarily bad news for the U.S. economy. 

To be sure, American travelers will pay more for hotels and souvenirs when they travel overseas. And foreign investors — hit by the double whammy of depreciating dollars and corporate accounting scandals — have begun pulling their money out of U.S. markets. 

At home, however, a lot of people stand to benefit from a weaker greenback. 

“The biggest gains will be for U.S. industries and workers that compete internationally,” said C. Fred Bergsten, director of the Institute for International Economics in Washington, D.C. “So will exporters and the firms that make products that compete with imports.” 

That’s because the weaker dollar will make U.S. goods less expensive abroad, stimulating sales. And it will make imports more expensive, improving the competitiveness of American-made goods. 

A weaker dollar also will benefit companies that earn money overseas. Their profits in euros or yen will buy more dollars and translate to improved earnings statements back home. 

Why is this happening now? 

Experts point to the U.S. trade deficit, which grew to nearly $350 billion last year — a level that can be sustained only if the United States continues to draw investment capital from the rest of the world to finance it. But low interest rates and the slumping stock market have made American investments less attractive. 

Bergsten said the dollar has fallen 5 percent over the past five months on a trade-weighted basis, which factors in the value of the currencies of major U.S. trading partners. He believes it could drop 20 percent before it stabilizes. 

The National Association of Manufacturers has been complaining for months that the dollar was inordinately strong. The Washington-based industrial trade group estimates the strong dollar cost the U.S. economy $140 billion in lost exports and 500,000 in lost manufacturing jobs over the past year and a half. 

Frank Vargo, NAM’s vice president for international economic affairs, believes that one reason the dollar dominated other currencies for so long was the U.S. Treasury’s “strong dollar” policy. 

“People took this to mean that the administration was happy with the dollar as strong as it was and would intervene (in the currency markets) to keep the dollar where it was,” Vargo said. 

He noted that after Treasury Secretary Paul O’Neill told a Senate committee in early May that the market should set the value of the American currency, “traders picked up on that and the dollar moved downward.” 

Depreciation of the dollar in the past has resulted in inflation. That’s because imported goods become more expensive, and domestic producers have the incentive to raise their prices, too.