Online edition of India's National Newspaper
Monday, Apr 05, 2004

About Us
Contact Us
Business
News: Front Page | National | Tamil Nadu | Andhra Pradesh | Karnataka | Kerala | New Delhi | Other States | International | Opinion | Business | Sport | Miscellaneous |
Advts:
Classifieds | Employment | Obituary |

Business Printer Friendly Page   Send this Article to a Friend

Implications of weaker dollar for U.S. economy

As a large chunk of U.S. exports goes to countries whose exchange rates are pegged to the dollar, the decline of the dollar against the pound, for instance, simply does not have the same impact on domestic producers that it might have had two decades ago.

ECONOMISTS, CHIEF executives and Washington policy-makers have hailed the weakened dollar as good news for the U.S. After all, when the dollar loses value against the euro or the British pound, for instance, it should make U.S.-made goods cost less in markets that use those currencies. Cheaper prices should stimulate bigger orders for American companies, especially those in the hard-hit manufacturing sector. And, as manufacturers exhaust their ability to produce more goods without adding labour, the pace of job creation should accelerate.

It sounds simple enough. But as is often the case, what economic theory says and what happens are two different things. "There are a lot of weak links in the chain between exchange rates and jobs," said Catherine L. Mann, senior fellow at the Institute for International Economics, based in Washington.

Just because the euro rises 36 per cent against the dollar — as it has since the beginning of 2002 — does not mean that U.S. exports to the euro zone will rise by that amount in the same time frame.

What gives?

First, trade between the U.S. and Europe — the two wealthiest and most developed markets in the world — is not the relatively simple trans-Atlantic trade that it was for centuries. Because many nations today, most notably China, link their currencies to the dollar, a decline in the dollar does not necessarily give the U.S. a competitive advantage on the Continent.

"While we may be able to lower our prices in Europe because of the stronger euro, so can every Asian country that pegs its currency to the dollar," said Ethan S. Harris, chief U.S. economist at Lehman Brothers.

And because a large and growing chunk of U.S. exports goes to countries whose exchange rates are pegged to the dollar, the decline of the dollar against the pound, for instance, simply does not have the same impact on domestic producers that it might have had two decades ago. "The share of our trade with the developing world has increased substantially over time," Mr. Mann said. "Europe isn't as important as it used to be".

Second, currency shifts often do not translate directly into changed prices for consumers. When the euro strengthens by 10 per cent against the dollar, the price a shopper pays for a bottle of Beringer wine at a liquor store in Dortmund, Germany, will not necessarily fall. "People who import the American-made goods take the opportunity to keep prices steady and increase their profits," said M. Cary Leahey, senior economist at Deutsche Bank.

Third, while we may live in an age of just-in-time inventory and instantaneous communication, when it comes to packing and shipping crates and containers of goods on huge boats across large bodies of water, the pace is a little slower. And a great deal of international trade is bound by contracts that fix prices for long periods.

"People make decisions on where to source their components in advance and tie themselves into contracts that last for several months or years," said Ian C. Shepherdson, chief U.S. economist at High Frequency Economics, based in Valhalla, New York.

That is why economists say it can take up to two years for significant currency shifts to wend their way into trade figures. Finally, it isn't just the price of goods that dictates how much you buy; it's also the amount of cash jingling in your pocket. Here again, Europe — whose comparatively high-income population should make it a natural destination for U.S.-made goods — has been lagging.

For several years, Europe's slow growth has turned it into a heavy caboose slowing the train of global growth.

And with the European Central Bank predicting growth of just 1.8 per cent for 2004, we should not expect demand for U.S. exports to rise sharply, regardless of whether the dollar slips further against its rival trans-Atlantic currencies.

The weakened dollar is having its expected effect. Over all, U.S. exports rose 4.58 per cent in 2003, to $1.018 trillion, according to the Census Bureau.

And in January 2004, exports were 8.5 per cent higher than they were in January 2003. But the enfeebled greenback may not be working its magic quickly enough for a nation that has grown impatient for job growth.

New York Times

New York Times

Printer friendly page  
Send this article to Friends by E-Mail

Business

News: Front Page | National | Tamil Nadu | Andhra Pradesh | Karnataka | Kerala | New Delhi | Other States | International | Opinion | Business | Sport | Miscellaneous |
Advts:
Classifieds | Employment | Obituary | Updates: Breaking News |


News Update


The Hindu Group: Home | About Us | Copyright | Archives | Contacts | Subscription
Group Sites: The Hindu | Business Line | The Sportstar | Frontline | The Hindu eBooks | Home |

Copyright 2004, The Hindu. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu