Economist William Sterling of Merrill Lynch & Co. calls it "the quiet crash of the dollar." He notes that, while the U.S. dollar has either strengthened or stayed steady against a number of minor currencies since 1987, its purchasing power in those currencies has fallen sharply--by 12% against Singapore's dollar, for example, 17% against Hong Kong's dollar, 21% against the Korean won, and 35% against the Mexican peso.
Inflation in many developing countries, explains Sterling, has far outpaced U.S. inflation. And although this would ordinarily cause their currencies to decline against the dollar to compensate for their lower real value, this hasn't happened. As anyone visiting Hong Kong or Mexico these days knows, greenbacks buy a lot less than they did four or five years ago.
What's behind this development? Falling interest rates in the U.S. have prompted a search for higher returns overseas, notes Sterling, just as a wave of privatization and market-based reforms has created the promise of permanently higher returns in developing countries. And their resulting inflow of capital has kept local money strong against the dollar, despite inflation.
For the U.S., the payoff from this dollar weakness has been a huge surge in exports to the developing world. Indeed, developing nations now take 38% of all U.S. exports, and they accounted for nearly 80% of U.S. export growth last year. What's more, with foreign exchange reserves soaring in many emerging nations, those countries appear to have the wherewithal to keep buying American for a long time to come.