In a selling frenzy, the U.S. dollar plunged to record lows last week against the German mark and the Japanese yen. Suddenly, money managers are concerned about the potential fallout: higher inflation and interest rates soaring to new heights. But there also is an upside for some industries, particularly those dealing in exports.
A5 Is a weakened dollar good or bad for the economy?
Andrew J. Moody
Executive vice president, WEFA Group
As any type of economist will say, "it's a matter of degree." Elements of a weak dollar are good for the economy. It fundamentally makes American exports cheaper. This opens up markets for U.S. goods, and it makes domestic goods more competitive with foreign imports.
But at this point, it's becoming a drag on the U.S. economy. What begins to happens is, dollar-denominated securities and bonds become less attractive to foreign investors. What that does is dry up the available funding for domestic investing. The stock market becomes less attractive, the bond market becomes less attractive. So it becomes much more difficult for the U.S. to raise the capital it needs.
Foreign goods become more expensive, so American producers may decide to raise their prices as well, which leads to higher costs, which will raise inflation. Then interest rates begin to rise. You start getting into a cycle.
As interest rates go up, businesses and consumers begin to spend less. Then the economy begins to slow down, and investors become less attracted to the U.S. economy.
Foreign investors are looking at North America as one big economy, so they're looking at the peso, and they're saying there's a big problem.
We've made a commitment to the peso, and we can't back out. If we do, the peso will collapse, and then the dollar goes with it.
Only one thing is worse than politicians determining monetary policy, and that's having traders determine it. Then you're getting into a zero-sum gain. People are not necessarily trading on the good of the economy. As in any commodity, or stock, it's "sell high, buy low."
Jeffrey D. Saut
Director of research, Ferris, Baker Watts Inc.
If you look historically, there's a line: "By your currency, ye shall be known as a nation."
A crashing dollar is no good. It's the world saying, "We don't have a lot of confidence in what you're doing." People won't accept dollar-denominated assets, or promissory notes, or bonds, or stocks in dollars except in productive assets.
Then interest rates go up. To attract money into the country, you raise interest rates to make their investment more attractive. It could have a detrimental effect on the economy. What happens when interest rates go up on adjustable mortgage loans?
This isn't a new phenomenon. Where you stand is a function of where you sit. For one person, a decline is bad; for another, it's good. Any stocks driven by exports, as the dollar gets cheaper, get more competitive internationally: aircraft, computers, high tech, telecommunications, pharmaceuticals, intellectual properties, movies.
But for people that export to us, all of a sudden, the price of a Lexus went up in terms of dollars. If you had a Lexus that cost $50,000 last week, this week it cost 7 percent more because that's how much the dollar declined against the yen in five days.
Donald A. Palumbo
Vice president and treasurer, McCormick & Co. Inc.
From a macro sense, obviously a falling dollar as severe as we've seen is probably not a very good thing because it might cause the Fed to move on interest rates.
We're such spenders in the U.S. for a great amount of foreign goods. They obviously become much more expensive in terms of U.S. dollars, which could create some inflationary pressure and might cause the Fed to raise interest rates again.
[Why is the dollar falling?] It's the Mexican situation, where we said we'd help them out. Part of it is a lack of confidence in our government.
Confidence can do wonders. We just have to restore confidence, to show that in fact we are getting deficits under control.
In a micro sense, more specific to McCormick, for any company that derives income and sales and revenue from overseas, as we with a significant interest in the United Kingdom, then it's beneficial because the same sales in sterling are worth more.
Now, McCormick also has operations in Mexico, whose currency is falling against the dollar. Unfortunately, nothing is that clear cut a picture.
But I don't see it on balance as being positive for the dollar to become weaker and weaker. It may force the Fed to increase interest rates. It just costs everybody more. Obviously, if rates are raised, you and I will have to pay more to finance anything. That's who bears the brunt of things.