The Fall of the Dollar - Does it Matter?

Discussion in 'Economics' started by ShoeshineBoy, Jan 1, 2008.

  1. Okay, someone explain this to me. The dollar has fallen almost 40% since 2002. Yet Europe seems none the weaker because of the falling dollar as the following link argues. In fact, Germany and much of Europe is stronger than ever. So what gives?

    Further, one could argue that the US has successfully absorbed most of the fall of the dollar since 2002. It's true we may enter a recession now, but it can hardly be argued that it was because of the dollar. It's really the subprime/credit/housing crisis that is the root of our difficulties now.

    So do currency fluctuations really matter assuming that they happen gradually?

    Why Europe should stop whining
    Forget fears that record-high valuation of the euro will hurt exports: all indications are that a strong euro means a strong Europe. Fortune's Peter Gumbel explains.
    By Peter Gumbel, Fortune Europe editor

    The euro's soaring heights against the dollar have not weakened the E.U.'s economy - far from it.
    More from Fortune
    A boom, a bust, and better days ahead

    PARIS (Fortune) -- Ever since the dollar began to fall against the euro in 2002, a chorus of government officials, economists and business executives around Europe - from the CEO of Airbus to the Prime Minister of Luxembourg - has complained publicly and in near-apocalyptic terms about the greenback's decline. Their argument has been that the tumbling dollar makes European goods less competitive on world markets and thus poses a big threat to the European economy overall.

    As the greenback's slide has accelerated in the past month, such warnings have grown ever more frantic. French President Nicolas Sarkozy told the United States in a speech to Congress last month that continuing monetary disorder could turn into "an economic war in which we would all be victims." Even Jean-Claude Trichet, the governor of the European Central Bank, chimed in last week, complaining about what he called "brutal" foreign exchange volatility.

    It's undoubtedly true that the plunging dollar - since 2002, the buck has fallen about 40% against the euro - does cause some pain around Europe, and its especially abrupt decline in the past couple of weeks has put nerves on edge in corporate finance departments trying to hedge against the drop. But the dire predictions about the bigger impact are looking about as accurate as Chicken Little's claim in the children's fairytale that the sky is falling.

    In fact, much of the available evidence suggests that a strong euro has done more good than harm for Europe. Far from weakening European competitiveness, it has hastened a major restructuring of industry that has enabled firms from L'Oréal to BMW to compete more effectively in worldwide markets. They and many others have focused on expanding in fast-growing markets at the same time as they have kept an iron grip on internal costs, and have racked up strong profits as a result.

    Moreover, the existence of the euro itself, which is now used by 13 European Union countries, has sheltered the European economy from much of the foreign-exchange turbulence, since a big majority of E.U. commerce is now with other E.U. countries. And at a time when world prices for food, energy and a multitude of other commodities that are denominated in dollars are rising, the strong euro is actually helping to mitigate the inflationary impact.

    Subprime on the Rhine
    The price of oil, for example, has risen almost five-fold in dollar terms since 2002, but "only" three-fold in euro terms. That's still a huge increase, of course, but less than it could have been. The evidence that best demonstrates the benefits of Europe's strong-euro policy is to be found in Germany, a country whose economy depends to a massive extent on exports, and therefore one that should be severely affected by the dollar's decline.

    But Germany's foreign trade numbers actually tell a story very different from the sky-is-falling scenario: exports have been racing ahead and the nation has notched up record trade surpluses. Indeed, despite the plummeting dollar, in 2006 Germany's trade surplus was about 25% higher than in 2002, and on current performance, this year looks likely to surpass that.

    How come? Because German exporters from car manufacturers to machine tool producers have realized that they cannot compete on price alone. So they have focused on quality, on marketing, on global expansion and on servicing their customers' needs wherever they are, even as they have sought to whack costs out of their system.

    Olaf Wortmann, an economist at the German Engineering Federation, whose members - largely machine-tool manufacturers - have boosted production by a blistering 39% in the past five years, says the last time business boomed so strongly was back in the late 1950s. The firms' biggest problems these days, he says, aren't caused by exchange rates but by production bottlenecks - currently, the industry is running its plants at 92% capacity. "All the talk about currency 'pain thresholds' is rather tiring," Wortmann says. "Of course the declining dollar does hurt, but it is overshadowed by many other positive factors." In particular, for German machine-tool companies, the strong demand from Russia, Chile, Canada, the Middle East and other places with strong natural resource sectors.

    Will that story line continue? The latest data for the euro countries released this week shows that economic growth actually picked up in the third quarter. The eurozone economy is currently growing at an annualized rate of 2.6% - stronger than forecast and far better than almost any other quarter of this decade. As usual, economists are warning that there are big risks ahead, including the slowing U.S. economy, business uncertainty about the credit market problems and, of course, the falling dollar.

    Olivier Gasnier at French bank Société Générale, for example, says he expects exports to be "far less dynamic" in coming months because of weaker international demand and "a loss of competitiveness triggered by the euro appreciation." That may be so, but as the European Commission pointed out in its latest economic forecast, while there are some signs that growth may be peaking, "the economic sentiment indicators remain well above their long-term average." Its conclusion: we should expect "relatively firm real GDP growth in the coming quarter."

    The one area of real concern in Europe relating to currencies is the Chinese yuan, which is roughly pegged to the dollar. The E.U. has been running a robust trade surplus with the United States, notwithstanding the greenback's decline, but its trade with China is looking ever more lopsided. Last year, its deficit with China hit $185 billion. Like the United States, European governments are now trying to put pressure on China to revalue its currency. Later this month, a delegation of officials including the ECB's Trichet and the E.U.'s two top economic policy officials, Commissioner Joaquin Almunia and Luxembourg Prime Minister Jean-Claude Juncker, will travel to China to apply the pressure in person.

    "China must come to grips with the idea that an undervalued currency is not only damaging for the global economy, and in particular for Europe, but also that it does not serve China's domestic interest, with inflation and excessive liquidities becoming an important problem for them," Ernst-Antoine Seillière, who runs Europe's main business lobby, said this week.

    How do you say Henny Penny in Chinese?
  2. Many things in economics take a while to take their toll.

    So generally when a currency devalues the improved competitiveness of the country (US) takes a while to impact on the increasingly less competitive countries (Europe). Like the markets, by the time the mass of the press/population figure it out its way too late. So Europeans have been celebrating their cheap overseas holidays with only a few noticing the downside. Australia has been losing competitiveness but the masses don't notice because exporting raw minerals isn't so directly affected by the nations currency (and thus wages and indirect costs). Give it time :)

    One thing though. I pointed this out to a European friend and he suggested that so many European goods were really made in China that the impact was significantly lowered.

    So on all fronts China is being exceedingly cunning to hang in there with the US dollar and just wait for Europe's loss of edge to pay returns. Watch for apparent concessions that give away nothing (a Chinese speciality). Big talk from eurozone Polis and Bankers is just that ... talk ... so lets watch for actions and effects.

    My pick: its too early for the big recession so the markets will be flat to up for 2008. Good trading all :)
  3. What goes down must .... :)
  4. So callled improved competiteveness through currency devaluation has one side effect - significantly lower life quality level.
  5. nevadan


    As I see it the game being played by the central banks is "Inflate your way to Prosperity". The ideal is 2% or something to promote growth, stability, or whatever the politically correct agenda might be. The problem is when the average inflation rates get out of balance relative to each other. In effect there is no fixed benchmark of value, only the relative differential between currencies. This is why the Chinese are being singled out as non-cooperators. They aren't playing the same game because they have a relative advantage by pegging to the dollar. The bottom line seems to be maintaining some sort of dynamic equilibrium between currencies while destroying the incentive to save.
  6. Aren't practically all the central banks inflating? China, Europe, the US, etc.?
  7. yep, gold is rising in most currencies..... and we are printing the fastest.....

    imo, the important thing is the trade deficit....

    we import plasctic crap and oil and we export US Treasury debt paper and porn.....

    this cant last...
  8. We're not printing the fastest... The US is around 12-15% money pump (and with that, the US Powers keep telling us, "inflation is only 2%, so don't worry" WHAT? Do they think we are fargin' MORONS? Actually, they do... and if the "proof is in the pudding", we are... heavy sigh), some, like China, are >20%.

    It's all bad... VERY BAD... but we are not the worst* offenders, at least on percentage terms.

    *bad enough that every politician deserves to be KICKED IN THE BALLS (minimum) by every American
  9. The US is already in a recession.

    Yes, the gov't says "No we're not"...

    But they also say inflation is low....

    The US has already been sold-out by the corps and smiling politicians- but like in the market, they have to keep the everyone distracted while they

    Look! Fergie is getting married!!
  10. Very laconic of you.

    I swear to God that is one of the most succinct ways I've seen it put. lol

    So true.
    #10     Jan 1, 2008