Dollar’s dive worries investors, consumers
Barry Katz, a retired lawyer in Silver Spring, Md., is angry and worried about the steep fall of the dollar and what it’s doing to his buying power as an investor and consumer.
It took only 82 cents to buy a euro just a few years ago, and now it takes $1.44, he noted. Meanwhile, the Canadian dollar has achieved parity with the U.S. greenback for the first time in a generation.
That means the value of some of Mr. Katz’s investments are in jeopardy, while European vacations and wine — and all things Canadian — have gone from being a good buy to being too exorbitantly expensive to consider, he said.
“Whatever happened to ‘Sound as a dollar?’ You remember that expression?” he said. Mr. Katz blames political leaders for allowing the dollar to sink so far, so fast.
Mr. Katz is not alone in registering alarm about the rapid decline of the dollar, which recently hit record lows against the euro and a basket of the world’s top currencies. A survey by UBS AG this month found the dollar’s drop is contributing to pessimism among U.S. investors, with 39 percent saying it’s hurting the investment climate “a lot,” and many saying it’s forcing them to plan less holiday spending.
The worries go all the way to the top in global finance, where some officials are worried a rout in the dollar could destabilize the world economy and markets. International Monetary Fund Managing Director Rodrigo de Rato recently noted the potential for serious disruptions from the steep fall of the dollar, which he said could be the result of a broad loss of confidence in the dollar worldwide or the cause of such a loss of confidence.
Some European governments and private analysts are calling for action by the Group of Seven nations to stop the dollar’s free fall — a hope that was disappointed at a meeting they held in Washington Oct 19.
“It is time to think about reviving King Dollar,” said Lawrence Kudlow of Kudlow & Co., a Republican economic adviser, noting that the fall of the dollar has set off an inflationary spiral in commodities like oil and gold that are priced in dollars. Speculators have latched onto the inverse relationship between commodities and the dollar and are exploiting it, driving down the American currency while driving up raw goods prices, he said.
“It seems as though any nasty international event leads to a dollar decline. This is not good,” he said. He called on Treasury Secretary Henry M. Paulson Jr. to “signal that enough is enough, and call a halt to the dollar’s decline.”
Most analysts say the dollar’s fall, which was accelerated by the Federal Reserve’s decision last month to cut interest rates, hasn’t reached threatening levels, though they note some worrisome trends. Countries where merchants used to welcome payment in dollars like Russia and South Africa recently outlawed the practice or officially discourage it. Some countries, like Kuwait, have grown so uncomfortable with the dollar’s persistent weakness that they’ve stopped linking their currencies to the dollar.
Central banks from Russia to South Korea, increasingly burned by their traditional investment of dollar reserves in U.S. Treasury bonds and AAA-rated U.S. debt securities, are diversifying out of the dollar and devoting more and more of their reserves to the euro and other currencies.
To facilitate the trend away from U.S. Treasury securities and toward investments far afield from Africa to Siberia, China, Russia, the United Arab Emirates and some other emerging countries have set up national investment funds with an estimated $3 trillion in assets to invest in stocks and venture partnerships around the world.
Besides cutting the purchasing power of Americans, these moves away from the dollar pose a big challenge for the U.S. economy in the long run. The investment of the bulk of the world’s reserves in U.S. bonds and other assets has been a critical source of financing for gigantic U.S. budget and trade deficits. Without that money, the U.S. government and consumers will not be able to go on spending 6 percent more than they produce each year.
Joseph Quinlan, chief market strategist at Bank of America, said he is not worried about the dollar going into free fall and shutting off financing for U.S. deficits. That’s because the rest of the world relies heavily on the U.S. as their prime export market, and many countries are increasingly dependent on exports for economic growth. A weak dollar discourages U.S. consumers from buying their exports.
While exports accounted for only 11 percent of growth in the U.S. economy last year, they accounted for 31 percent of growth worldwide, up from 25 percent in 2000, according to the IMF. The export share was even higher in top trading partners like Germany, China, and Canada, where it was 45 percent, 38 percent and 36 percent, respectively.
“The world, in our opinion, is not ready for another big move down in the buck,” Mr. Quinlan said. “Such a move would undercut the primary source of growth of many nations. Kicking the export habit isn’t going to be easy” for them.
While the dollar’s fall has touched off an inflationary spiral in oil, gold and other commodity prices, it has had one important benefit: It has generated a boom in U.S. exports, from farm crops to heavy industrial equipment, as countries around the world deploy their large stores of dollars to go bargain-hunting in the U.S.
In a rare development for the U.S., a 12 percent gain in exports has been the strongest contributor to growth this year, providing critical support for the economy at a time when other previously strong sectors from consumer spending to construction have been weighed down by a severe recession in housing.