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MULTINATIONAL BOOST. Of course, some sectors stand to do better than others. The biggest winners from a typical dollar decline are suppliers of consumer staples, energy, materials, and technology, while laggards tend to be financial services, utilities, and telecom, Merrill says.
Better results are already showing for U.S. multinationals such as McDonald's Corp. (MCD ), which reported on May 13 that its sales in Europe rose 19% in April. Most of that was the result of foreign-currency translation, not because the Oak Brook (Ill.) giant sold more burgers and fries in Europe.
With higher profits have come an improved stock market and increased investor wealth -- another plus for the economy. Fatter corporate profits should also relieve some of the pressure on companies to slash costs to boost earnings.
COMPETITIVE ADVANTAGE. Over time, manufacturers in a host of industries from steel to office machines should also enjoy improved pricing power, as the weaker dollar forces foreign rivals to raise prices in the U.S. That's what U.S. carmakers are hoping. For Chrysler Group, "the very strong dollar we've had since about 1997 gave foreign manufacturers...a pricing advantage," says DaimlerChrysler (DCX ) economist Van Jolissaint in Auburn Hills, Mich. A weaker dollar "will help us -- if not today, then later this year and next year, because it will reduce the ability of foreign manufacturers to offer discounts."
U.S. exporters of consumer and capital goods should also benefit from a weaker currency. The dollar's fall will allow them to cut local currency prices and grab market share abroad without having to take a hit to their dollar-denominated earnings.
Indeed, while it will take some time to play out, a weaker dollar should help trim the record U.S. current account deficit -- the widest measure of trade. That, in turn, should boost U.S. economic growth. Last year, U.S. domestic demand grew 3%, but about a half-percentage point of that was effectively filled by foreign companies thanks to America's insatiable demand for imports.
UNEVEN TUMBLE. This year, the foreign-trade sector should again be a drag on growth, but less so than it was in 2002, says former International Monetary Fund Chief Economist Michael Mussa. In 2004, it should be a small plus for the economy, as the trade deficit finally starts to turn down.
Even with the steep decline of the dollar, though, not all import prices are headed higher -- and not all of the U.S.'s trade problems will be resolved. In part, that's because the dollar's fall has been uneven and mostly concentrated against the euro.
Asian nations have acted to prevent their currencies from appreciating against the greenback. Japan sold $20.5 billion worth of yen in the first quarter in a move that limited the dollar's slide. And China, whose first-quarter trade surplus in goods with the U.S. soared from $7 billion in 1996 to $25 billion today -- giving it the world's biggest surplus with the U.S. -- has kept its carefully controlled currency steady against the dollar.
SLOW LEAK. That means there's no pressure on China to raise the prices of its exports. And if those prices don't rise, there's no reason to believe U.S. buyers will cut back on their purchases of Chinese goods or that the trade surplus will diminish.
Europe, on the other hand, is suffering the brunt of the dollar's fall. So far, European policymakers have reacted with equanimity to the euro's steep rise. Wim Duisenberg, president of European Central Bank, says the euro's strength is not yet a real concern. But it's a big worry for European companies, which are urging the ECB to cut interest rates.
That would be welcome in Washington. The Administration has been pestering America's trading partners to do more to boost global growth. It's also privately putting pressure on Beijing to allow its currency to float upward against the dollar in order to rein in surpluses. But that strategy is unlikely to bear fruit any time soon, especially since the spread of SARS threatens to slow China's economic growth substantially.
Letting the air out of a bubble is never easy. There's always the risk that too much will come shooting out too fast. But in the case of the deflating dollar, so far, so good.
Copyright 2003, Bloomberg L.P.
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