Dollar's woes not all bad news

Posted: Friday, January 17, 2003

NEW YORK (AP) -- The dollar tumbles against most major currencies, and this is good news? For the struggling U.S. economy, it may very well be.

That might be hard to understand because it sounds so illogical to want our currency to be weak. But this isn't a call for a complete free fall in the dollar forever -- just a little weakness for a little while.

It could help give a much-needed jolt to corporate profits, consumer prices and maybe even the labor market.

So much attention in recent weeks has gone to President Bush's $670 billion economic stimulus package. That, though, may take a long time to have much effect.

In the interim, the declining dollar might be of some help to the economy, which has been experiencing sluggish growth over the last few years.

Since early last year, the dollar has fallen more than 20 percent against the euro, the currency that represents 12 European nations, and about 10 percent vs. the Japanese yen.

And foreign-exchange analysts say more weakness could be ahead. Factors that have been undermining the dollar recently include worries about possible war with Iraq and the future course of the U.S. stock market.

That's a big switch from just a few years back, when the dollar was considered the most favored currency in the world.

Its strength was due in part to the surging U.S. financial markets, which spurred lots of dollar-buying from foreigners looking to invest here.

In addition, the U.S. government supported a ''strong dollar'' policy through most of the 1990s, so it would continually take steps to bolster the currency. While the Bush administration says it supports a strong dollar, it hasn't taken much action.

That may be because a weak dollar isn't so bad right now for our current economic state.

It makes U.S. goods less expensive abroad, which can potentially boost demand for our products and services because they may be cheaper than what is manufactured in local foreign markets.

And when imports here jump in price, that means U.S. manufacturers don't have to discount as much to compete. That helps their pricing power, which in turn wards off some deflationary risks.

Think of it like this: A U.S. automaker that sells to Europe might see a spike in demand because of lower prices of its cars. That same automaker will fare better here against European imports because they will be more costly.

''A weak dollar makes foreign goods more expensive in theory, and that can help the economy,'' said David Solin, partner at Foreign Exchange Analytics in Essex, Conn.

Corporate profits also benefit from improved currency conversions. When companies do business abroad, they often get paid in local currencies. Eventually, they have to exchange that money for dollars when figuring out their earnings. So when foreign currencies are strong, they can buy more dollars and that lifts profits.

The labor market has something to gain, too, from a declining dollar. As demand grows for U.S. goods, companies could be more inclined to increase hiring.

The weak dollar, though, isn't something that anyone should hope will last.

It could hurt U.S. financial markets over the long term because foreigners wouldn't be inclined to buy U.S. assets like stocks and bonds. It also hurts tourism and those industries that support travel, with prices rising for Americans looking to go abroad.

''The weak dollar cuts both ways, depending on where you are sitting,'' said Lynn Reaser, chief economist and senior market strategist at Banc of America Capital Management. ''There are some real strengths of having a weak dollar, but there are some problems that can't be ignored.''

The dollar's troubles might just give the economy a bit of the lift it needs.

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Rachel Beck is the national business columnist for The Associated Press. Write to her at rbeck(at)ap.org



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