Markets & Finance

The U.S. Dollar: Still Going Down


The dollar's weakness does a lot more than alter your vacation plans—and there's good news and bad news in the currency's decline

You aren't planning a flight to Düsseldorf anytime soon. Yokohama isn't on your calendar, either. So should you care that the dollar has plunged in value against the euro, the yen, and other currencies? For sure. Because even a nation as big and relatively insulated as the U.S. is profoundly affected by changes in the value of its currency, in ways both good and bad.

The dollar's slide continued on Feb. 28, when it hit nearly $1.52 per euro, the most money it has taken to buy a euro since the common currency was launched a decade ago. The U.S. Dollar Index, which tracks the dollar vs. a market basket of six major currencies, fell to 73.7, which is a decline of about 4% so far this year and 39% since early 2002. Currency traders were unimpressed by the support for the dollar voiced Feb. 28 by President George W. Bush, who said: "We believe in a strong dollar policy, and we believe, I believe, our economy's got the fundamentals in place to grow and continue growing."

Here are six winners and losers from the dollar's swan dive:

Blue Collars Win: Factory workers have been among the biggest economic losers over the past two decades. Even over the past year, as the dollar fell, manufacturing lost another 269,000 jobs. But the cheap dollar should begin to turn that situation around. It makes it easier for American exporters like Boeing (BA) and Caterpillar (CAT) to gain market share abroad, and helps U.S. companies fight off competition from imports. "The primary beneficiary of the cheaper dollar will be blue-collar labor." says James Paulsen, chief investment officer of Wells Capital Management in Minneapolis.

Consumers Lose: You'll pay more for French wine, Korean electronics, and products made from Chilean copper. Domestic producers may take advantage of the situation to sneak through some of their own price increases. That will help push up the overall inflation rate. Producer prices increased 7.4% in the year through January. Jeoff Hall, chief U.S. economist at Thomson Financial (TOC), argues that the Fed is making a big mistake by giving secondary consideration to the inflation threat as it fights the economic slowdown and credit crunch. Says Hall: "I don't think they're doing the consumer any favors by cutting rates."

Disney World Wins: American tourist destinations, from Disney World (DIS) to New York City's Times Square to Chicago's Navy Pier, win two ways from the cheap dollar. First, "It's getting pretty darn cheap to visit if you're a Canadian or a European," so foreign tourism is increasing, says David Wyss, chief economist at Standard & Poor's. In Manhattan, Europeans and Asians are arriving in such throngs that some merchants have started accepting euros in payment. Meanwhile, upper-middle-class Americans who might have jetted off to Rome are spending their diminished dollars at home.

Banks Lose: Foreign investors, including the super-rich sovereign wealth funds of oil-exporting and Asian nations, are losing faith in the dollar as a storehouse of value. So they're beginning to shift their money out of the U.S. financial system to Europe and elsewhere. Plus, rising interest rates hurt bank profits by eroding the value of their holdings such as bonds and fixed-rate mortgages, notes Wyss.

Farmers and Miners Win: Prices of raw commodities such as wheat, soybeans, copper, and platinum are going through the roof. That's not just because of increased global demand—in fact, foreign growth is showing signs of slowing. It's a speculative bet on higher inflation that just so happens to benefit American commodity producers. "As the Fed deals with one bubble in housing it creates another in commodities," says Thomson's Hall.

Retailers Lose: These days, a huge percentage of the things you buy at retail—including clothing, toys, and electronics—is imported. Retailers are paying more for goods but having a hard time pushing through price increases to consumers, so their profit margins are narrowing. It's not a good time to be Wal-Mart (WMT).

Overall: Win or Lose?

While economists broadly agree on who the winners and losers are, they disagree on whether the bottom line of a cheaper dollar, netting everything out, is positive or negative. Thomson's Hall votes for negative. He says the Fed should stop cutting interest rates, or even raise them, to prop up the dollar's value in the currency market. "The Fed needs to back off from its accommodative stance," says Hall. "I think it's backfiring disastrously."

But Wells' Paulsen takes the opposite viewpoint. He notes that the cheaper dollar's effect in shrinking the trade deficit has contributed about one percentage point to economic growth over the past year, which has just about offset the big drag on the economy from the falloff in homebuilding. If the dollar hadn't fallen, says Paulsen, the economy would be in much weaker condition. "Right now," he says, "I'd argue that the good outweighs the bad."

Coy is BusinessWeek's Economics editor.

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