Dollar Decline Benefits U.S. Economy as Presaged by Feldstein
Dollar Decline Benefits U.S. Economy
Scott Eells/Bloomberg
U.S. dollar bills are arranged for a photograph in New York, U.S.
U.S. dollar bills are arranged for a photograph in New York, U.S. Photographer: Scott Eells/Bloomberg
Aug. 25 (Bloomberg) -- David Malpass, president and founder of Encima Global, talks about the U.S. dollar and outlook for Federal Reserve Chairman Ben S. Bernanke's speech in Jackson Hole, Wyoming, tomorrow. He speaks with Matt Miller on Bloomberg Television's "InsideTrack." (Source: Bloomberg)
A weak dollar may be one of the bright spots in the U.S. economy, and it could be the gift that keeps on giving.
“A lower dollar means more exports, and it also means a shift from consuming imported products to consuming goods and services that we produce in the United States,” said Harvard University economics professor Martin Feldstein in a telephone interview.
As central bankers from across the globe meet at an annual conference starting tomorrow in Jackson Hole, Wyoming, financial markets are waiting to see whether Federal Reserve Chairman Ben S. Bernanke signals more stimulus measures to help revive the world’s largest economy. A third round of asset purchases, or so-called quantitative easing, would weaken the dollar further, Feldstein said.
A declining dollar makes American-made goods from companies such as Deere & Co. (DE) and Caterpillar Inc. (CAT) more competitive in foreign markets. It also lays the groundwork to spur domestic demand for U.S.-produced items as import prices rise.
The dollar has fallen 6.3 percent this year as of 4:15 p.m. in New York yesterday, making it the worst performer among the 10 major currencies tracked by Bloomberg Correlation Weighted Currency Indexes, and is down 49 percent since reaching a record high in 1985. American exports have climbed 16 percent this year through June compared with a year ago, according to Commerce Department data.
Growth in the U.S. has slowed since early 2010, when gross domestic product expanded at a 3.9 percent annual pace. GDP rose at a 1.3 percent rate in the second quarter of this year after a 0.4 percent pace from January through March, according to the Commerce Department.
Slower Than Expected
The slower-than-forecast growth “furthers the belief that there might be some more easing, coming in with more stimulus, and that would obviously put even more pressure on the dollar,” said Fabian Eliasson, head of U.S. currency sales at Mizuho Financial Group Inc. in New York.
The weakening currency has another benefit for the U.S., according to Feldstein, who’s also a member of the Business Cycle Dating Committee of the National Bureau of Economic Research, which determines when recessions start and end.
“One of the things about the declining dollar is that it doesn’t add to the national debt,” he said. The currency’s slump also hasn’t caused an acceleration in inflation. The cost of living in the U.S. increased 27 percent during the last 10 years, compared with 30 percent in the previous decade and 49 percent in the 10 years before that, according to the Labor Department’s consumer-price index.
Record Lows
Borrowing costs and interest rates also are at record lows. The Fed pledged on Aug. 9 to keep its target for overnight loans among banks near zero until at least mid-2013. The Fed cut the rate in December 2008, which has contributed to all-time lows for mortgage rates. The average 30-year fixed-rate contract was 4.15 percent in the week ended Aug. 18, down from 4.42 percent a year ago, according to Freddie Mac, the government-supported mortgage financier based in McLean, Virginia.
Deere, the world’s largest farm-equipment maker, is among U.S. manufacturers benefiting from a weaker dollar. A 22 percent increase in third-quarter sales to $8.37 billion included “a favorable currency-translation effect,” and demand in Asia is “forecast to rise sharply again this year,” the Moline, Illinois-based company said in an Aug. 17 statement.
Currency Benefit
Sales at Caterpillar, the world’s largest construction- and mining-equipment maker, “actually benefited $351 million” from a weaker dollar in April-June compared with the second quarter of 2010, Michael DeWalt, director of investor relations at the Peoria, Illinois-based company, said on a July 22 conference call with analysts.
Second-quarter sales of $30.1 billion for Wal-Mart Stores Inc. (WMT)’s international unit included a $2.3 billion “currency- exchange translation benefit,” the Bentonville, Arkansas-based company said in an Aug. 16 statement. Wal-Mart is the world’s largest retailer.
Other companies -- including Oracle Corp. (ORCL), the world’s top supplier of database software, and United Technologies Corp. (UTX), which gets more than half its sales from overseas -- have cited gains from favorable currency exchange rates in earnings reports.
While Feldstein forecasts further declines in the dollar, he said he isn’t advocating for the currency to weaken.
Curb Export Demand
Treasury Secretary Timothy F. Geithner has said the U.S. wants a strong dollar, while the currency’s appreciation may curb demand for U.S. exports and make it more difficult for President Barack Obama to reach his goal of doubling shipments by 2015.
“A strong dollar will always be in the interest of the United States,” Geithner said in June at an event in Washington.
A declining dollar weighs on personal incomes, leaving households to pay more for imported items that would go up in cost because of decreased buying power, Feldstein said.
Imports have climbed 16 percent this year through June compared with the year-ago period, according to Commerce Department figures. The cost of goods shipped to the U.S. so far this year is up 8.9 percent, Labor Department data show.
Policy makers, particularly at the Fed, are running out of monetary tools to stimulate the U.S. economy. Another round of asset purchases would prompt a quicker decline in the dollar, according to Feldstein.
“If they did a QE3, the domestic effect of that would be relatively small,” Feldstein said. “We’ll get some of it, potentially, through the exchange rate, so that would simply accelerate this exchange-rate effect.”
To contact the reporter on this story: Timothy Homan in Washington at thoman1@bloomberg.net
To contact the editor responsible for this story: Chris Wellisz at cwellisz@bloomberg.net
Rate this Page