The Falling U.S. Dollar Is A Good Thing

The strength of the U.S. dollar is in trouble. In March a $1.25 bought you 1 euro, now it takes $1.50. But I’m here to tell you that this may not be a bad thing, at this time.

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. And products imported become more expensive.

When the U.S. dollar becomes weak, American goods become more affordable for the rest of the world. This increases demand for American made goods. Which increases business for American firms who rely on exports.

If you paid attention to the non-conservative media, you may have noticed that an increase in exports is one of the largest chunks of the 3.5% GDP growth. The conservative media wants you to think that Cash For Clunkers is the only reason the GDP is in the black, but that is just not true.

A weak dollar is beneficial for American manufacturing, a sector of the U.S. economy that needs all the help it can get.

Marlin Steel Wire's President Drew Greenblatt told the Los Angeles Times last week "the lower dollar has been like wind behind my sails." Greenblatt went on to project that exports will make up 25 percent of his business this year, about "twice as much as in 2008."

Robert Stevenson, the owner of Eastman Machine in Buffalo, New York just signed a multi-million dollar deal with a European firm, to supply them with his steel products.

“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.”

“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.”

The devaluing of the dollar has become a political cry for the right.

The New York Times wrote:

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.

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.

The Financial Post reported:

The extremely weak dollar is a third source of stimulus for the U.S. economy, in addition to the authorities' fiscal and monetary efforts. The U.S. recession would be far worse if the dollar were not so cheap, while the high euro is exacting a heavy price in the Eurozone.

The U.S. economy eked out annual GDP growth of 0.4% in 2008. That would have been a 0.8% drop if exports had not increased by 5.4% and imports fallen by 3.2%. The trade boost persisted in the first half of this year when world trade was all but collapsing: U.S. imports declined even more than exports fell. A weak dollar makes foreign sellers struggle to compete in the huge U.S. market.

The story is the opposite in the Eurozone. In the fourth quarter of 2008, net trade, the difference between export and import growth, subtracted more than a percentage point of GDP growth from the Eurozone economies. Poor trade performance is a major reason why the export-dependent German economy will decline by about 5% this year, twice as much as the U.S. one. The German government is forecasting just 0.75% growth in 2010. Consensus forecasts see the U.S. economy growing more than three times faster.

The devalue of the U.S. dollar has only happened in relation to the value of the currency of other countries, namely the Euro and the Yen. In comparison to China the change is little.

It is not inflation that devalued the dollar.

What that means is that the worth of the dollar does not affect Americans domestically. If the devaluing was due to inflation, then there should be concern.

The only way it affects us domestically is in the form of imports. Everything from other countries becomes more expensive, including oil. And the lower the dollar falls, the more expensive oil gets.

Inflation in 2009 actually fell, though it is being forecasted that it may start to increase next year, but not at an alarming rate.

In June and July of last year, inflation was above 5%. By the beginning of fall this year, inflation had gone done into the negatives.

"Inflation is not an immediate concern," Ryan Sweet, an economist at Moody’s Economy.com in West Chester, Pennsylvania, was quoted on Bloomberg.

"We’re probably going to see core inflation continue to soften over the next couple of months" and "this will likely keep the Fed on the sidelines for the foreseeable future."

The cries over the falling dollars are based in political bias and not economical data. The devaluing dollar will actually help the American economy. Manufacturing, exports and the tourism markets all have benefitted from a weaker dollar, while hurting imports.

When the value of the Euro goes up, or the value of the Yen goes up, European and Japanese companies, to benefit from the cheaper dollar, rely on higher manufacturing output from their American plants.

This obviously creates and saves jobs in the American economy, puts food on American tables.