- The stock that virtually every American owns is falling.
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- The dollar, which buoyed the U.S. economy with a 50 percent
gain since 1995, has slipped as much as 7 percent against major currencies
since January in what many describe as the beginning of a prolonged decline.
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- The implications for Americans go deeper than just raising
the price of a European vacation.
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- If the drop picks up momentum, it could saddle consumers
with higher prices on everything from appliances to automobiles to houses.
It also could further diminish the stock market's performance and, in the
worst case, stall a global economic recovery.
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- On the positive side, particularly for those on fixed
incomes, banks will pay higher interest rates on deposits.
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- Additionally, a weaker dollar would help reduce the nation's
growing current-account deficit - the gap between money flowing to and
from the United States - and make U.S. exports more competitive abroad.
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- Experts say the extent to which Americans feel the dollar's
decline depends on whether it picks up speed or continues its gradual slide.
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- "Right now, we're seeing a fairly small movement
from a very high plateau. If that trend continues, we shouldn't be overly
concerned," said Sung Won Sohn, chief economist at Wells Fargo. "It's
pretty clear the dollar has peaked and will continue to depreciate.
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- "For consumers, that could mean generally higher
prices. Honda and Toyota may raise prices. GM and Ford and Chrysler may
also raise prices because they have to compete. In turn, inflation could
lead to higher interest rates," he said.
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- Higher interest rates would cut across the economy, reducing
stock investments and raising home prices through increased mortgage rates.
Some see imminent danger if that scenario plays out.
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- "The current and potential continuing dollar weakness
is one of the most critical threats to the U.S. economy," Pimco investment
chief Bill Gross recently told Fortune magazine.
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- Merrill Lynch economist Jesper Koll observed last week
that a spiraling dollar crisis would have profound effects on Wall Street,
the housing market and the global economy.
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- "To defend the currency, U.S. Federal Reserve Chairman
Alan Greenspan would have to raise rates - so Wall Street crashes and the
property bubble bursts," Koll wrote in a commentary for the Wall Street
Journal's online edition.
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- The Fed then might have to reverse course, slashing interest
rates to stimulate investment and pushing the dollar down even further.
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- But don't trade all your dollars for euros yet, most
observers say. The prevailing wisdom among economists and currency experts
is that the U.S. economy can withstand a gradual decline in the dollar,
which may have risen to unsustainable levels in recent years.
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- "What's happening is realistic, and it's not a major
indication of anything wrong except maybe the dollar was a little overvalued
versus other major currencies, and now it's coming into line," said
Jeff Thredgold, an economist for Vectra Bank Colorado. "It will have
a very minor impact on inflation."
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- Indeed, a precipitous 20 percent fall in the dollar would
increase U.S. consumer prices by just 1 percent, said Laurie Cameron, global
currency strategist for JP Morgan Private Bank.
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- "We give that possibility a very low likelihood,"
she said.
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- The bank, which manages investments for wealthy individuals,
predicts the dollar will fall another 5 to 10 percent by the end of the
year. Cameron said that's probably not enough to prompt any action by the
Fed.
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- But the bank is advising customers to invest some of
their assets in more promising currencies like the Australian and Canadian
dollars and the Norwegian and Swedish kronas, as well as the stable Swiss
franc.
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- JP Morgan isn't bullish on the euro or the yen and doesn't
believe investment opportunities in Europe or Japan are attractive enough
to cause a large shift away from U.S. stocks. That should protect the dollar
against a big slide, Cameron said.
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- Adds Sohn: "The dollar has been strong because the
U.S. has been strong. This is where the action is, where the productivity
is, where the innovation in technology takes place. People still want to
put money where the action is."
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- The dollar's current slide, however, is a clear signal
that global investors have lost some enthusiasm for the U.S. economy.
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- A currency's value is determined by the direction and
volume of cross-border investment, and until recently investors sent far
more money to the U.S. than they took out.
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- Now they appear to be seeking better opportunities elsewhere.
More than $4.4 billion flowed into overseas stock mutual funds through
the first four months of the year, according to the Investment Company
Institute. During the same period last year more than $4 billion was taken
out of those funds.
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- Thredgold identifies three causes: lowered expectations
for a quick economic recovery here as outlooks improve for other economies,
such as Europe's; protectionist trade moves by the Bush administration;
and the constant threat of terrorist attacks.
-
- Others add the accounting scandals plaguing corporate
America and mounting concern about the size of the U.S. current-account
deficit, which could grow to 5 percent of gross domestic product by the
end of the year.
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- In March, Fed chairman Greenspan warned that the deficit
- essentially the gap between what the nation consumes and what it produces
- threatens the economy's health as an ever-larger flow of interest payments
are made to foreigners.
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- Ironically, the dollar's surge during the past seven
years had the effect of sharply increasing the size of the deficit.
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- About 40 percent of the increase in U.S. capital stock
during the past six years was financed by foreign investment, during the
last six years, Greenspan said.
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- The biggest advocates of narrowing the trade gap and
reigning in the dollar are the nation's manufacturers, who say they've
been hurt by years of dollar inflation.
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- "Made-in-the-USA products have become 25 percent
to 30 percent more expensive than foreign products," National Association
of Manufacturers president Jerry Jasinowski told members of a Senate committee
last month.
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- "This didn't happen because U.S. producers became
less productive or efficient. And it didn't happen because they raised
their dollar prices. It happened only because the price of the dollar rose
in terms of foreign currencies," Jasinowski said.
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- One such manufacturer is Eaton-based Harsh International,
which ships about 30 percent of its hydraulic lifts for dump trucks to
Canada and the United Kingdom. Harsh president Bob Brown said the dollar's
strength has slowed the growth of his 180-employee company.
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- "The last several years it has represented as much
as a 20 percent price increase in our exports, even though we haven't had
a price increase," he said. "It's been a real competitive disadvantage
for us."
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- But now Harsh is beginning to see more demand for the
1,000-pound pumps that sell for about $2,000 apiece.
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- "Prior to the softening of the dollar, we were probably
shipping two large containers a month out of country," he said. "Now
it's up to three."
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- http://www.denverpost.com/Stories/0,1413,36%257E11%257E675631%257E,00.html
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