Maybe it’s the way reports of the dollar’s value are worded each day that gives rise to the visceral response when the U.S. currency tanks once a decade or so.
The dollar is often written about as if it is the home team, and when foreign currencies rise in value against it, the narrative often seems to suggest that the home team is being challenged by an upstart underdog.
A “weak dollar” is “losing ground” to the Euro, yen or yuan, the stories read. It all comes off more as a matter of national pride than of the epic financial give and take that it is.
“Whenever there is talk of a weak dollar, the media tends to over-exaggerate the importance of it,” said Cliff Waldman, an economist for the Manufacturers Alliance/MAPI, a public policy and economics research organization in Arlington, Va.
That certainly seems to be the case right now.
The value of the dollar has slipped -- precipitously in the eyes of some -- in recent months, and there is growing sentiment that the cause is rising global disenchantment with current U.S. fiscal policies.
The fears driving the dollar down are two-fold: that the U.S. government is printing far too much money in an effort to stimulate its hobbled economy, and that the U.S. national debt is approaching an unmanageable level.
Both situations are contributing to global concerns that the U.S. currency isn’t worth what it once was, and may never be worth that again.
Moreover, if big holders of U.S. dollars, such as China, which owns $767 billion in U.S. Treasury securities, start unloading the currency, all that extra supply will flow back to the U.S. and rampant inflation is sure to follow.
Already some countries such as India are already seeking other kinds of reserves—euros and gold, for example—to replace dollars.
All of this has led to whispers that the dollar should be replaced as the world’s reserve currency, which, regardless of what it might mean to the global economy, would be a huge blow to U.S. pride.
Two points should be made clear, however.
First, the current value of the dollar, similar to the valuations of securities in every other financial market, is tied directly to health of the U.S. economy as it struggles to recover from the worst financial crisis in decades.
In other words, the relatively steep decline needs to be put into historical perspective.
Second, a weak -- or depreciated -- U.S. dollar is often good for the U.S. economy, in the short term, at least. A weak dollar means American goods cost less in foreign markets, which helps boost U.S. exports, be they agricultural or manufactured goods.
The second point is clearly what’s driving U.S. fiscal policy as the Obama administration seeks to stabilize the domestic economy and create jobs.
Clearly sensitive to the concerns, Federal Reserve Chairman Ben Bernanke addressed the issue earlier this week: “We are attentive to implications of changes in the value of the dollar and will continue to formulate policy to guard against risks to our dual mandate to foster both maximum employment and price stability,” he said in a speech in New York.
Here’s some historical perspective.
Since February 2002 the dollar has been experiencing a secular, or long-term, decline.
Then, a year ago, amid the global financial chaos that followed the collapse of the U.S. housing market, investors seeking safe havens poured money into U.S. Treasury notes, which quickly pushed the value of the dollar sky high again.
But since March, when aversion to risk began to decrease and money started moving back into stock markets, the dollar has fallen 16%.
“Eventually panics end and markets normalize, and that’s what we’re seeing now,” said Waldman. “Global investors, as they’re starting to see relief from the panic, they’re ready to take some risks again and they’re pulling money out of safer Treasury markets and putting it elsewhere. So of course the dollar comes down again. It’s not a crisis. In fact, it would be a crisis if the dollar didn’t come down.”
Waldman noted that as financial cycles goes “this one was a bruiser” because the dollar rose and fell so swiftly. And that explains a lot of the attention.
Ultimately, Waldman said he takes issue with the terms “strong” and “weak” dollar. The more important terms are “competitive” and “non-competitive.”
“We want our goods to be competitively priced in global markets,” he said.
Had the dollar remained at its abnormally high valuations of a year ago it would have been at the expense of U.S. exports, which would be priced too expensive for many foreign markets.
So the dollar’s decline was not only “inevitable” as the panic abated, according to Waldman, it was also “needed as an important boost for economic recovery for the U.S.”
The problem is that no one really knows where the U.S. government should step in to halt the decline in an effort to stave off inflation.
“There is no line,” said Waldman.
Critics of the current policies are urging immediate action.
“The U.S. dollar has become the world’s reserve currency because, over many decades, the U.S. pursued more prudent policies than many other countries. In the meantime, it is in no one’s interest to have a weak dollar,” wrote Axel Merk, manager of the $400 million Merk Hard Currency Fund.
“The fruits of the weak dollar policy may include a lower standard of living, a greater wealth gap, inflation and a rather unstable U.S. and global economy. That’s a high price to pay, even when paid in today’s depreciated dollar,” Merk wrote.
Waldman’s not worried, though.
“At some point some sophisticated investor, either a hedge fund or investment bank, will look at the dollar and see it as a bargain, say ‘It’s time to buy,’ and jump in.”
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