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In Dollar’s Fall, Upside for U.S. Exports
By NELSON D. SCHWARTZ
Published: October 18, 2009
PARIS — As economists, pundits and politicians debate the reasons for the dollar’s rapid fall, Robert Stevenson and his workers in downtown Buffalo, N.Y., watch the slide with glee.
Doug Benz for The New York Times
"The dollar has allowed us to be much more aggressive overseas," said Robert Stevenson, head of Eastman Machine.
Mr. Stevenson’s family-owned company, Eastman Machine, has been making cutting tools for the textile industry for 120 years. A year ago, in the depths of the financial crisis, Mr. Stevenson had to lay off a dozen workers, but the dollar’s almost 20 percent decline since March has made his goods much more competitive overseas. Next month, Mr. Stevenson hopes to sign a multimillion-dollar deal in Europe that could enable him to rehire his workers.
“This wouldn’t have happened five years ago, or even two years ago,” he said. “Business conditions are still slow but the dollar has allowed us to be much more aggressive overseas.”
The story of Eastman Machine is a small echo of the larger shifts accompanying the dollar’s fastest drop in six years; last week the dollar neared $1.50 against the euro, compared with $1.25 in March. The weakness of the dollar, if sustained, could force American consumers to get used to paying more for many imported goods as well as trips to their favorite vacation spots.
But there is also an upside: a weak dollar could prove beneficial to the American economy by aiding long-suffering manufacturers, rebuilding a stronger industrial base and lifting exports even if it makes life harder for trading partners around the world, especially in Europe.
“As long as it doesn’t crash, a gradual, orderly decline is healthy,” said C. Fred Bergsten, director of the Peterson Institute for International Economics. “The dollar went up 40 percent between 1995 and 2002, so this is a necessary rebalancing.”
It is a highly charged political issue, and the sinking American currency has already spurred attacks on the Obama administration from Sarah Palin, the former Republican nominee for vice president, and others in her party who argue that a weaker dollar points to a weaker America.
“We lose our position as the world leader if the dollar is no longer the currency of favor,” said Senator Jon Kyl of Arizona, the No. 2 Republican in the Senate. He pointed out that he was critical of President George W. Bush for letting the dollar fall, too, “but this administration is making things worse by its spending and deficit policies.”
Most ominously, many foreign central banks are rethinking the dollar’s status as the world’s premier reserve currency, said Neil Mellor, a currency strategist at BNY Mellon Global Markets in London. That, in addition to domestic factors like historically low United States interest rates and a ballooning federal budget deficit, are worsening the dollar’s downward movement.
In addition, while the Obama administration maintains that it favors a strong dollar, it has shown no sign of taking any major steps to support the currency.
Whatever the politics, the economics are complex. Over the long term, a weaker dollar could narrow the long-running United States trade deficit, helping close the gap between exports and imports, as American products become more affordable overseas.
But that comes at a price — higher costs at home for imported goods as diverse as Italian suits, French wines and Japanese stereos and cameras, as well as more prosaic commodities like oil. The dollar’s drop is a central factor in oil’s recent rise back above $75 a barrel, which will mean higher gasoline prices.
The dollar has moved sharply before. Most recently, it weakened in the summer of 2008, only to strengthen drastically after the collapse of Lehman Brothers a year ago sent investors worldwide fleeing to the relative security of American assets like Treasury bonds.
Now, the political arguments over the dollar’s trajectory are accompanied by a fierce debate among economists.
“Dollar weakness is a major problem for American jobs and living standards,” said David Malpass, a longtime Wall Street economist who has been among the most outspoken critics of the dollar’s decline.
“As the dollar devalues, we have less capital and purchasing power compared to the rest of the world, and there is an increasing risk of higher interest rates and inflation,” Mr. Malpass said.
But Mr. Bergsten argues the dollar is only now getting back to a fair valuation against other currencies if the United States is to continue to close its trade gap.
With the recent drop, he said, the dollar is fairly valued against the euro but needs to ease 10 percent against Asian currencies like the Japanese yen to create a level playing field for American business.
And for all the fluctuations against the dollar by major currencies, the dollar has not moved at all recently against the Chinese renminbi, which is managed by Beijing in ways that allow Chinese exporters to enjoy a weaker currency and gain market share worldwide.
The Treasury secretary, Timothy F. Geithner, has consistently said the administration favors a strong dollar, but currency markets focus on the unlikely prospect of concrete action, like an interest rate increase.
“The Obama administration may say they want a strong dollar,” Mr. Mellor said. “But everyone knows they haven’t got the means to support it. The Federal Reserve can’t raise rates, and the White House can’t cut the budget deficit anytime soon.”
If the dollar does keep falling and the euro keeps rising, it could increase trade tensions with Europe, especially big exporters like Germany, which have already been hard hit by the global economic slump.
“The strength of the euro is coming at absolutely the wrong time,” said Jens Nagel, head of the international department of the German Exporters Association in Berlin. “The U.S. is our biggest trading partner after the European Union, and it’s a big blow to the recovery of auto companies and industrial exporters.”
Mr. Mellor predicts the dollar will keep dropping, reaching $1.60 against the euro by early next year. And, there are signs that even much bigger companies than Eastman Machine are adapting.
As the global economy recovers and international manufacturers ramp up output, they are giving priority to their more competitive plants, including those in the United States, said Pierre Dufour, senior executive vice president at Air Liquide, a French supplier of industrial gases to steelmakers, semiconductor firms, and other industrial giants worldwide.
“It has two sides, like it always does,” said Carl Martin Welcker, owner of a machine tools maker, Schütte, in Cologne, Germany.
“On the one hand, it makes our machines significantly more expensive,” said Mr. Welcker, whose equipment churns out 80 percent of the world’s spark plugs. “On the other hand, we’re seeing international companies move production back to the U.S., which helps our sales there.”
Maïa de la Baume contributed reporting from Paris.
By NELSON D. SCHWARTZ
Published: October 18, 2009
PARIS — As economists, pundits and politicians debate the reasons for the dollar’s rapid fall, Robert Stevenson and his workers in downtown Buffalo, N.Y., watch the slide with glee.
Doug Benz for The New York Times"The dollar has allowed us to be much more aggressive overseas," said Robert Stevenson, head of Eastman Machine.
Mr. Stevenson’s family-owned company, Eastman Machine, has been making cutting tools for the textile industry for 120 years. A year ago, in the depths of the financial crisis, Mr. Stevenson had to lay off a dozen workers, but the dollar’s almost 20 percent decline since March has made his goods much more competitive overseas. Next month, Mr. Stevenson hopes to sign a multimillion-dollar deal in Europe that could enable him to rehire his workers.
“This wouldn’t have happened five years ago, or even two years ago,” he said. “Business conditions are still slow but the dollar has allowed us to be much more aggressive overseas.”
The story of Eastman Machine is a small echo of the larger shifts accompanying the dollar’s fastest drop in six years; last week the dollar neared $1.50 against the euro, compared with $1.25 in March. The weakness of the dollar, if sustained, could force American consumers to get used to paying more for many imported goods as well as trips to their favorite vacation spots.
But there is also an upside: a weak dollar could prove beneficial to the American economy by aiding long-suffering manufacturers, rebuilding a stronger industrial base and lifting exports even if it makes life harder for trading partners around the world, especially in Europe.
“As long as it doesn’t crash, a gradual, orderly decline is healthy,” said C. Fred Bergsten, director of the Peterson Institute for International Economics. “The dollar went up 40 percent between 1995 and 2002, so this is a necessary rebalancing.”
It is a highly charged political issue, and the sinking American currency has already spurred attacks on the Obama administration from Sarah Palin, the former Republican nominee for vice president, and others in her party who argue that a weaker dollar points to a weaker America.
“We lose our position as the world leader if the dollar is no longer the currency of favor,” said Senator Jon Kyl of Arizona, the No. 2 Republican in the Senate. He pointed out that he was critical of President George W. Bush for letting the dollar fall, too, “but this administration is making things worse by its spending and deficit policies.”
Most ominously, many foreign central banks are rethinking the dollar’s status as the world’s premier reserve currency, said Neil Mellor, a currency strategist at BNY Mellon Global Markets in London. That, in addition to domestic factors like historically low United States interest rates and a ballooning federal budget deficit, are worsening the dollar’s downward movement.
In addition, while the Obama administration maintains that it favors a strong dollar, it has shown no sign of taking any major steps to support the currency.
Whatever the politics, the economics are complex. Over the long term, a weaker dollar could narrow the long-running United States trade deficit, helping close the gap between exports and imports, as American products become more affordable overseas.
But that comes at a price — higher costs at home for imported goods as diverse as Italian suits, French wines and Japanese stereos and cameras, as well as more prosaic commodities like oil. The dollar’s drop is a central factor in oil’s recent rise back above $75 a barrel, which will mean higher gasoline prices.
The dollar has moved sharply before. Most recently, it weakened in the summer of 2008, only to strengthen drastically after the collapse of Lehman Brothers a year ago sent investors worldwide fleeing to the relative security of American assets like Treasury bonds.
Now, the political arguments over the dollar’s trajectory are accompanied by a fierce debate among economists.
“Dollar weakness is a major problem for American jobs and living standards,” said David Malpass, a longtime Wall Street economist who has been among the most outspoken critics of the dollar’s decline.
“As the dollar devalues, we have less capital and purchasing power compared to the rest of the world, and there is an increasing risk of higher interest rates and inflation,” Mr. Malpass said.
But Mr. Bergsten argues the dollar is only now getting back to a fair valuation against other currencies if the United States is to continue to close its trade gap.
With the recent drop, he said, the dollar is fairly valued against the euro but needs to ease 10 percent against Asian currencies like the Japanese yen to create a level playing field for American business.
And for all the fluctuations against the dollar by major currencies, the dollar has not moved at all recently against the Chinese renminbi, which is managed by Beijing in ways that allow Chinese exporters to enjoy a weaker currency and gain market share worldwide.
The Treasury secretary, Timothy F. Geithner, has consistently said the administration favors a strong dollar, but currency markets focus on the unlikely prospect of concrete action, like an interest rate increase.
“The Obama administration may say they want a strong dollar,” Mr. Mellor said. “But everyone knows they haven’t got the means to support it. The Federal Reserve can’t raise rates, and the White House can’t cut the budget deficit anytime soon.”
If the dollar does keep falling and the euro keeps rising, it could increase trade tensions with Europe, especially big exporters like Germany, which have already been hard hit by the global economic slump.
“The strength of the euro is coming at absolutely the wrong time,” said Jens Nagel, head of the international department of the German Exporters Association in Berlin. “The U.S. is our biggest trading partner after the European Union, and it’s a big blow to the recovery of auto companies and industrial exporters.”
Mr. Mellor predicts the dollar will keep dropping, reaching $1.60 against the euro by early next year. And, there are signs that even much bigger companies than Eastman Machine are adapting.
As the global economy recovers and international manufacturers ramp up output, they are giving priority to their more competitive plants, including those in the United States, said Pierre Dufour, senior executive vice president at Air Liquide, a French supplier of industrial gases to steelmakers, semiconductor firms, and other industrial giants worldwide.
“It has two sides, like it always does,” said Carl Martin Welcker, owner of a machine tools maker, Schütte, in Cologne, Germany.
“On the one hand, it makes our machines significantly more expensive,” said Mr. Welcker, whose equipment churns out 80 percent of the world’s spark plugs. “On the other hand, we’re seeing international companies move production back to the U.S., which helps our sales there.”
Maïa de la Baume contributed reporting from Paris.
