A falling dollar gives American companies a chance to offer their products at bargain prices overseas. So unless you’re traveling abroad or buying imported goods, a continued slide in the dollar can be a good thing. But a falling dollar has other consequences that are not so obvious and, in some cases, not so pleasant. For starters, those record low interest rates that have made borrowing so cheap may soon begin moving higher again.
THE DOLLAR — along with the U.S. stock and bond markets — moved lower Monday after comments by U.S. Treasury Secretary John Snow were interpreted by investors as a signal that the Bush administration supports a weaker dollar. The White House later gave assurances Monday that its “strong dollar” policy remains in place.
But many analysts — and currency traders — remain unconvinced. A weaker dollar now could help the U.S. economy perk up next year — just in time for the presidential election, according to Greg Anderson, a senior foreign exchange economist at ABN-Amro.
“I would say that the strong dollar policy has evolved from ‘strong dollar’ to ‘strong dollar because we have to say it’ to ‘sound dollar’ and now to ‘sound dollar so well defined that it seems like weak dollar,’” he said on CNBC Monday.
InsertArt(1904562)The dollar’s value rises and falls minute by minute, based on the whims of currency traders around the world. But the U.S. Treasury, by buying or selling billions of dollars in the helps to manage the value of the dollar in relation to other currencies. So even the perception of a shift in policy can create a short-term move as traders try to anticipate the Treasury’s moves.
With the U.S. economy stuck in neutral — and worries about deflation cropping up — some economists believe a weaker dollar could be the right medicine. Conventional wisdom holds that a weaker dollar makes U.S. products more competitive abroad (because they get cheaper in local currencies) and tends to maker imports more expensive here. That helps make U.S. companies more competitive — and makes it more likely they’ll begin hiring again.
Following a steady slide in the dollar over the past year, those benefits have already begun to show up on the bottom line of U.S. companies with significant operations abroad. Chewing gum maker Wm. Wrigley Jr. said overseas sales jumped 17 percent in the first quarter, mostly because of a weaker dollar, which added $40 million to the company’s revenues. The battered buck also gave a boost to Sarah Lee, which reported 5 percent higher income and 4 percent more revenue for the first quarter. Eastman Kodak posted a $12 million profit; without a weaker dollar the company would have reported a loss.
The list of other companies also helped by the dollar’s slide in the first quarter includes Altria, Bausch & Lomb, Baxter International, Caterpillar, Deere, Kellogg, Kimberly-Clark, McDonald’s, Procter & Gamble, and Weyerhaeuser.
Wall St. thinks a weaker dollar could help some industries more than others. Analysts at J. P. Morgan and Credit Suisse First Boston said in research reports Monday that winners will include industries including energy, food and beverages, technology and tobacco, CNBC reported. Industries expected to be hurt by a weaker dollar include auto components, media and hotels.
GUN-SHY INVESTORS?
But over the long run, a “weak dollar” policy could backfire, according to Greg Valliere, a Washington-based analyst for Schwab Research Group.
“I think you have you got to be careful what you wish for,” he said. “A weak dollar might mean foreign investors will be gun-shy about buying stocks and bonds because the value could go down.”
INTEREST-RATE RISK
Lower demand for U.S. Treasury bonds would push interest rates higher — because overseas investors would demand higher rates to offset the loss in value they’d see when they convert dollar-based investments back into their own currencies.
That could put an end to the mortgage refinancing boom that has put billions of dollars into U.S. consumer’s pockets in the form of lower monthly payments.
A weaker dollar would also push prices of some imported goods higher — and help competing U.S. companies raise their prices too. That could eliminate recent worries that a prolonged bout of deflation could wipe out corporate profits. With a weaker dollar, you’ll pay more for a Lexus or Mercedes. So that takes the pressure off Ford and General Motors to keep their prices in check.
At least that’s what happened in the mid-1980s, the last period of a deep and prolonged dollar slide. But broad shifts in global manufacturing since then — to emerging manufacturing countries like China — could substantially reduce the U.S. price advantage of a weaker dollar, according to Andrew Hodge, and economist at Global Insight.
“A large swath of U.S. consumption is cheap-labor-cost consumption,” he said. “And most of the cheaper-labor-cost countries have pegged their currency to the dollar, so (their currency has) moved down with the dollar.”
Weakening the dollar — while it helps make U.S. products more competitive overseas — hurts companies in those overseas markets. And at a time when the German economy is in tatters, and the Japanese economy gripped by a prolonged period of deflation, a weaker dollar could further postpone the recovery of those key U.S. markets.
“In effect, (a weaker dollar) exports deflation to the rest of the word,” said Hodge.The Associated Press contributed to this report.