Falling dollar can help economy — to a point

John W. Schoen Senior producer • Profile • E-mail

The recent slide in the dollar has some readers wondering: Is this really such a bad thing? Well, no, it isn't. Unless it goes too far.

Why is it bad for an American if the dollar falls in value? Doesn't it put more of us to work because we are now more competitive with the world?
— Chris C. Everett, Wash.

The recent drop in the value of the dollar has, in fact, been a good thing for anyone who works for a company that sells goods or services abroad. The reason is simple: As the dollar falls relative to the value of another country’s currency, people using that foreign currency can buy more stuff priced in dollars. Since American-made goods and services become cheaper abroad, companies making those goods and providing those services make more sales, hire more workers, and so forth.

It’s true that America imports far more than it exports, and that much U.S. manufacturing has moved offshore to take advantage of cheaper labor in developing countries. But exports still account for a large and growing chunk of the U.S. economy. Last year, exports of goods and services added $1.6 trillion to the gross domestic product — up from a little over $1 trillion in 1998.

A falling dollar is also good for large, far-flung U.S. companies taking advantage of rapid growth in the developing world and expanding their markets in developed countries. If you sell a lot of Pepsi in Japan, for example, you get paid in yen. As the dollar falls, those yen become more valuable. When you eventually convert your yen back to dollars to bring them home, you get a nice little lift to the bottom line. Shareholders like that.

Of course some people hate to see the dollar fall, including American tourists in Europe whose spending power is weakened when they face a dinner check priced in euros.

The biggest losers, though, are foreign investors and countries that bought U.S. Treasury securities or any other investment denominated in dollars. The falling dollar makes these investments worth less to them.

The risk for them — and us — is that the dollar falls too far, too fast, or both. For now, investors don’t seem to be too bothered by the dollar’s gradual decline. If the dollar falls rapidly, though, they could get spooked and slow or stop buying dollar-based investments.

That’s why the folks at the Fed and the Treasury keep a close eye on the dollar. As the world’s biggest borrower, the Treasury badly needs foreign investors to keep coming back.

If the drop in the dollar eats too deeply into their investment, those foreign buyers are going to demand higher interest rates every three months when the Treasury goes to auction the next bazillion dollars worth of securities. As long as Congress spends money faster than the government takes in, the Treasury has no choice but to pay whatever it takes to move those freshly printed bonds and notes.

If the Treasury has to pay higher interest rates, the cost of borrowing goes up for anyone else borrowing dollars. As a big buyer and seller of Treasuries, the Federal Reserve can — and does — try to keep a lid on interest rates. But it only has so much money to play with. If investors in the bond market decide interest rates should go up, they'll go up.

With the U.S. economy still trying to get back on its feet and banks still mopping up hundreds of billions of dollars of bad loans, that’s exactly what we don’t want to see happen. A falling dollar may bring more orders for a U.S. exporter. But that company won’t be able to borrow the money needed to expand production if the cost of borrowing rises too far.

MORE FROM ANSWER DESK

Answer Desk Section Front

Jobless benefit bedlam Who needs overpaid bankers? Who gets extended jobless benefits Easing job losses point to wobbly recovery Long-term jobless face frayed safety net GDP growth overstates case Recession over? Readers don't believe it Breaking down the cost of health care Commercial real estate bust looms 'Official' job numbers don't tell the whole story Answer Desk Section Front   Add Answer Desk headlines to your news reader: