Dropping dollar pays off for some, costs others

The almighty U.S. dollar hasn't been so mighty lately. For the past 18 months, the greenback has taken a one-way trip south, tumbling about 45 percent against the euro, the common currency of the European Union. Last week, the euro rose to an all-time high against its American rival. What does the dollar's fall mean? Who gains and who loses as the buck sucks wind? Here are a few answers.

Question: Why is the dollar falling?

Answer: The usual explanation for the dollar's duress has to do with enormous twin deficits run by the United States. Every year we buy roughly $500 billion more in goods and services from foreigners than we sell overseas. At the same time, the federal government is running a budget deficit of more than $400 billion annually. Many economy watchers believe the United States is living above its means and will eventually have to cut back. "We are consuming more than we are producing," said Daniel Meckstroth, chief economist of the Manufacturers Alliance/MAPI, a trade group. That undermines confidence in the dollar.

Q: How much is the dollar's fall a matter of market psychology and how much is it a matter of economic fundamentals?

A: There's no question that sentiment is paramount in the day-to-day movements of the dollar. Traders and speculators sense the greenback's weakness and are betting it will continue, giving the trend added momentum. But ultimately fundamentals are driving the decline. To put it simply, the United States gives the rest of the world more than half a trillion dollars every year. In exchange, the rest of the world gives us products and services. That of course increases the supply of dollars held by foreigners. All else being equal, that increased supply will result in a lower price, i.e., a falling dollar.

Q: Has the dollar fallen harder against some currencies than against others?

A: Absolutely. The euro, the greenback's main competitor, has been the biggest gainer, along with the British pound sterling and such Triple-A players as the Canadian and Australian dollars. To protect their domestic industries, major Asian exporting nations such as Japan, South Korea and Taiwan have intervened in the markets to prevent their currencies from rising too strongly. As a result, the yen has appreciated less than half as much as the euro in the past 18 months. China is a story of its own. Its currency is fixed to the dollar and doesn't change. That's one of the reasons Chinese exports to the United States have risen unabated despite the dollar's fall in most of the rest of the world.

Q: Is a lower dollar good or bad for America?

A: It runs counter to intuition, but a gradual descent of the dollar is basically good for the country. Indeed, many experts argue that it is an essential part of the process of trimming America's trade deficit with the rest of the world. To be sure, the dollar loses bragging rights and the United States loses prestige. And consumers find Italian suits, French wines and German cars more expensive. But American goods and services become cheaper overseas. International sales of U.S. corporations rise, which boosts profits and preserves jobs here.

Q: Come on. It's not that simple, is it?

A: Truthfully, it isn't that simple. Different sectors are affected in different ways. Farmers, manufacturers and the U.S. tourist industry love a weak dollar because their products and services become more competitive in the global marketplace. But American banks and brokerage firms prefer a strong dollar because that attracts money from around the world. Retailers also like a strong dollar because it allows them to buy imported goods cheaply.

It gets even more complicated. Industries that import foreign-made components will find those parts more expensive. And companies with operations overseas may experience all kinds of contradictory effects. A U.S. company with a plant in Ireland exporting to the United States could find that facility less profitable in euro terms. But those smaller euro earnings might be worth more in dollars when repatriated to this country.

Q: So, who are the real winners?

A: The list of winners starts with American producers of goods and services. If they are exporters, their products become more affordable for foreign buyers. Even if they sell mainly to the domestic market, they benefit from the higher prices foreign competitors have to charge in the United States. The U.S. wine industry is a case in point. Imported wines have gone from about a 9 percent to a 25 percent share of the American market in the past few years. But, "after growing like crazy, imports almost came to a halt in October," according to consultant Jon Fredrikson. The falling dollar "is definitely on everybody's mind," he said.

Q: And the losers?

The losers are consumers, who have to pay more for imported goods. American tourists also are suffering sticker shock when they get their London hotel bill or the tab at that cozy Roman trattoria. "These are all examples of foreign goods and services that we have been consuming to excess," said University of California-Berkeley economist Barry Eichengreen. "That's what the decline in the dollar will eventually correct as we cut back on our consumption of these items."

Q: How does the White House view the falling dollar?

A: The White House won't say so explicitly, but according to observers across the political spectrum, a lower dollar is the third leg of the Bush administration's economic policy, alongside tax cuts and low interest rates. "There seems to be a vested interest in the administration for a continued orderly decline of the dollar," said Bank of America currency strategist John Rothfield. A cheap dollar boosts American industry at the expense of foreign competitors and helps keep jobs in the United States.

Q: Does a falling dollar bring any dangers with it?

A: A lower dollar is only positive if it comes down gradually. "There is a real risk that an orderly retreat can turn into a rout," Cohen said. In such a scenario, panicked currency traders around the world would dump dollars, sending it into a tailspin. Overseas investors would withdraw money, and interest rates could rise.

Q: Is such a crash likely?

A: United States is consuming far more than it produces, while going ever deeper into debt to pay for all that stuff. That can't continue indefinitely. Former Treasury Secretary Robert Rubin and the International Monetary Fund have raised the specter of a painful readjustment, with rising interest rates and slow economic growth. It's possible that such a situation could be touched off by a collapse of the dollar.

But other economists maintain that adjustment need not be abrupt. Interest rates have stayed low and the stock market has boomed even as the dollar has fallen, they note.

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