The dollar is in free fall, or so it seems. In 2002, you could buy a euro for 86 cents. Today, it will cost you $1.40. You'd have to go back at least a decade to find a time when the U.S. dollar was so weak. Against some currencies, such as the Canadian dollar (the "loonie"), you'd have to go back 30 years. It sounds ominous, but is a weak dollar really so terrible?
Not necessarily. A weak dollar can be good for the U.S. economy, because it makes American exports cheaper and, therefore, helps close the trade deficit. But over the long term, the value of a country's currency is seen as a verdict on the overall health of its economy.
It's difficult — impossible, some economists say — to tease out the effects of a weak dollar from all of the other variables affecting the economy at any moment. But one thing is clear: The weak dollar creates ripples around the world. Some of those ripples are good, some bad. But that, too, is relative. Where you stand on the weak dollar depends largely on where you sit.
The most obvious effect of a weak U.S. dollar is its impact on American tourists traveling to Europe. In Paris, $7 cups of coffee and $50 taxi rides are suddenly de rigueur. A weak dollar affects even those American consumers who never leave home. If you have a penchant for German cars or French wine, expect to pay more, as European manufacturers raise prices to compensate for the weak dollar.
In fact, some economists warn of an "umbrella effect" — the tendency for the prices of all goods and services to rise once a few do. Other economists, though, say the risk of inflation is exaggerated. The core inflation rate, they point out, remains low — about 2 percent — despite the dollar's recent slide.
Why? For one thing, European manufacturers tend to give American consumers a break. Weak dollar or not, they're reluctant to raise prices and lose market share. The U.S. market is simply too large and lucrative.
The biggest mitigating factor, though, is China. As any trip to Wal-Mart reveals, many of the consumer goods sold in the U.S. are now made in China, and the Chinese currency, the yuan, is, in effect, pegged to the dollar, so fluctuations on the currency market don't greatly affect prices for Chinese-made goods.
No such cushion, though, applies to oil prices. They are high, hovering near a record of $80 a barrel, and that is due, in part, to the weak dollar: Oil-rich nations charge higher prices to compensate for the weaker dollar.
On the other hand, the weak dollar is very good news for European tourists visiting the United States — and for the American retailers who cater to them. The reason is simple: The British pound and the Euro go a lot farther than they used to.
"America is on sale," says Patricia Edwards, a managing director of Wentworth, Hauser and Violich, a financial consulting firm. "It's like walking into Macy's and finding that everything is 30 percent off. You might buy more than you would otherwise."
A weak dollar is also good news for American manufacturers. Their products are now less expensive, so they can sell more. That's why companies such as Boeing and Caterpillar like a weak dollar. It's also why many economists like it: As these big U.S. manufacturers sell more, the U.S. trade deficit shrinks.
There is one downside, though, especially for smaller American manufacturers. The weak dollar means that the firms themselves are cheaper and, therefore, vulnerable to a hostile takeover by foreign companies.
The weak dollar has brought cries of glee from some unusual quarters. "As the dollar continues to fall, students in Delhi are thrilled that going to college in America is a little bit cheaper," said a report on the Web site of New Delhi Television in India. "The bills for an American education are still gigantic, but every penny saved is worth a little celebration."
Eventually, if the dollar stays weak, foreign investors will be less likely to put money in U.S. Treasury securities without much higher interest rates — and that, in turn, can make it more expensive for American consumers to borrow.
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