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The weak US dollar is boosting the economy.
In 2007, the relative value of the American dollar plummeted. One British sterling pound is worth $2.03 and one Euro buys $1.44; even the once lowly Canadian dollar has surpassed its American counterpart. Most international trade is conducted with US dollars and many traders are upset, as they see the Euro as a viable alternative. Foreign investors are becoming disinclined to purchase US stocks and bonds, and economists worry that rapid disinvestment may ensue, crashing the stock market and rapidly increasing interest rates. US dollars no longer make sense to American tycoons like Warren Buffet and Bill Gates. Even rapper Jay-Z “dissed” the greenback in a new music video. The US dollar is weak because the American economy is weak, as America’s low interest rates indicate. The American Federal Reserve determines interest rates based on the state of the economy. When interest rates are high, banks are inclined to distribute loans, while low interest rates dissuade lending. Because Americans are over-indebted, American interest rates are currently quite low and banks are hesitant to lend (thus the credit crunch). If interest rates continue to decline, so will the Dollar’s worth. Although slightly higher interest rates will facilitate lending and spending, rapid increases will leave Americans woefully indebted. Thus, the Fed walks a tightrope when determining rates. The American economy must strengthen if the Fed is to raise interest rates. Fortunately, the dollar’s weakness is boosting the economy. In the long-run, a strong currency is vital to the American economy, but the weak greenback is serving America’s immediate economic interests. Thanks to the weak dollar, American products are less expensive and thus increasingly competitive in foreign markets. American exporters are benefiting tremendously and the export boom is alleviating America’s unsustainable trade deficit. Sales of American-made cars, computers and agriculture are up, and it is increasingly cost effective for European companies to manufacture consumer products in the US, thereby creating jobs for Americans. Due to strong currencies and powerful labor unions, the costs of production are high in much of the EU; many products manufactured in the EU are too expensive for American consumers. American labor is relatively cheap and America’s industrial infrastructure is relatively strong, so European companies are increasingly inclined to manufacture products in the US for American consumers. America’s weak dollar is also attracting tourists, particularly from Europe. European travelers can spend less money in New York City or Las Vegas than they might in London or Paris. Many are seizing the opportunity to visit the United States, as are droves of non-European tourists. In 2007, tourists spent approximately $92 million in the U.S., 7.5 percent more than in 2006. Stability is paramount. If the US dollar’s worth continues to decrease, international traders will have little choice but to opt either for Euros or for a combination of currencies. However, if the dollar stabilizes, traders will be patient. A recession in the US would be detrimental to the global economy, and the international community is trying to ease the credit crunch by flooding American banks with capital. The plan is to create liquidity, but it may also cause inflation and increase American debt. Nevertheless, additional capital should strengthen the economy, so long as banks allocate loans responsibly. After all, America’s currency crisis is a result of over-lending and over-spending. Resilient and adaptable, the American economy is resisting recession without a strong currency. The weak US dollar is stimulating the economy by reducing the trade deficit, creating jobs, and boosting tourism. And as the American economy recovers, so too will the dollar. Sources:Peacock, Mike. 'Central banks put credit plan into action'. Reuters. December 17, 2007. 'Rapper Jay-Z dissing the dollar'. BBC News. November 16, 2007.
The copyright of the article America’s Depreciated Dollar in International Financial Affairs is owned by Jonas Gamso. Permission to republish America’s Depreciated Dollar in print or online must be granted by the author in writing.
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