Dol­lar’s dive wor­ries in­vestors, con­sumers

The Washington Times Weekly - - National - By Pa­trice Hill

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.

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