The U.S. dollar, still the benchmark for
world currency, has been sagging the
past several years. A detriment to U.S. consumers and U.S. companies that import
products, the weakening dollar benefits
some players in the global marketplace.
“Exporters will generally see their sales
increase as the price of their product
becomes cheaper in foreign currency terms,”
says Gary Loe, vice president, foreign
exchange at Comerica Bank.
Smart Business spoke with Loe about the
weakening dollar, who benefits from it and
why he expects the dollar’s value to increase
as the year progresses.
What are some of the factors behind the
weakening of the dollar?
Current economic factors that may be signaling recessionary conditions in the U.S.
economy and could undermine confidence
of U.S. dollar-based assets include the downturn in housing, turbulence in the equity markets and job woes. Additional interest rate
cuts by the U.S. Federal Reserve could further erode the return of investors as lower
interest rates may produce additional inflationary pressures, lowering the dollar’s value.
Also, continued budget and trade deficits
tend to weaken the U.S. dollar.
We are in an election year and increased
political uncertainty could warrant a more
cautious approach to holding assets based on
the U.S. dollar. Lower oil prices could reduce
demand for U.S. dollars, as oil is priced in
U.S. dollars globally. More and more countries are diversifying away from the U.S. dollar as their principal reserve currency and are
substituting the euro, pound, yen and others.
Who benefits from the weakening dollar?
Exporters will benefit from the weakening
dollar. Mutual funds with overseas investments rise along with the currency they are
denominated in as long as the funds don’t
hedge against currency movement. People
holding foreign currency accounts or notes
will benefit as well as people holding gold;
gold is priced in dollars across the globe and
generally rises when the dollar loses value as
buyers using other currencies drive up the
price as it becomes cheaper. Also, our trade deficit should decrease as U.S. entity sales
outside the country increase, and U.S. companies will buy less from foreign trading partners. The weak dollar is encouraging foreign
manufacturers to set up factories in the U.S.,
bringing jobs and other economic benefits.
How does the dollar’s lower value help
exporters?
The weak dollar makes American goods
and services less expensive in the global marketplace. Therefore, exporters should
increase their sales. The entities buying the
exporters’ goods will be able to purchase
them with fewer units of their own currency.
Also, sales could increase as buyers shift purchases they currently transact with entities in
other countries.
Do you expect this trend to continue?
In the long run, we should see the trend
continue. The two major factors driving this
are, one, the current account deficit — a
broad measure of U.S. global trade and
investment — and, two, the federal budget
deficit. Experts don’t expect either to narrow
significantly anytime soon, so in the long
term, the dollar could very well keep falling.
What is your forecast for the dollar in the
remainder of 2008?
There are many reasons why we could end
2008 with the dollar at a higher value than
today. The U.S. Federal Reserve has made it
clear that it wants to be ‘ahead of the curve,’
meaning it would rather risk a little inflation
than bear the consequences of a recession.
Unlike in the recent past, when interest rate
cuts weighed on the dollar, new cuts may be
viewed by the market as a monetary stimulus
and spur investment, help correct housing
imbalances and aid in minimizing the effects
of a recession.
The dollar trend of the past few years, coupled with a stabilizing to improving equity
market, will tend to encourage U.S. dollar
demand (investment) as U.S. investments are
bargains compared to anytime during the
past few years. Higher oil prices (higher inflationary pressures) will tend to increase demand for U.S. currency. The upcoming elections could help the U.S. dollar as policies are
re-enacted, amended or abolished. At the end
of the day, foreign central banks will not want
super-strong currencies, as it tends to diminish demand from the world’s largest consumer market — the United States — for foreign goods, which is needed to boost the rest
of the world’s economies. I believe dollar positives will outweigh dollar negatives, and we
will end the year with a slightly higher dollar.
How do fluctuations in the dollar’s value
affect today’s global economy?
The U.S. has the biggest impact on the global economy and its monetary unit value, and
fluctuation has the greatest effect relative to
other currencies. The value affects company
profits, budgeting and manufacturing costs.
It has ramifications on capital investment,
plant openings and closings. For example,
some companies that have outsourced customer service and call centers to India have
returned these centers to the U.S., since the
weak dollar has eroded the cost benefits of
operating overseas. It all underscores the
importance of hedging currency risk to help
mitigate variances from companies’ forecasts and plans.
GARY LOE is vice president, foreign exchange at Comerica Bank. Reach him at (800) 318-9062 or [email protected].