Dollar’s Decline Brings Troubles but Helps U.S. Exports


PARIS — As economists, pundits and politicians

debate the reasons for the dollar's rapid fall,

Robert Stevenson and his workers

in downtown Buffalo, N.Y., watch the slide with glee.


Robert Stevenson, left, president and

chief executive officer of Eastman Machine,

a manufacturing facility owned by

the Stevenson family for over 100 years,

on the manufacturing floor Thursday in Buffalo, N.Y.

Mr. Stevenson's family-owned company,

Eastman Machine, has been making cutting tools

for the textile industry for 120 years. A year ago,

in the depths of the financial crisis, Mr. Stevenson

had to lay off a dozen workers, but

the dollar's 16 percent decline since March has

made his products much more competitive overseas.

Next month, Mr. Stevenson hopes to sign

a multimillion-dollar deal in Europe

that could enable him to rehire his workers.

"This wouldn't have happened five years ago,

or even two years ago," he said.

"Business conditions are still slow but

the dollar has allowed us to be much

more aggressive overseas."

The story of Eastman Tool is a small echo

of the larger shifts accompanying

the dollar's fastest drop in six years; last week

the dollar neared $1.50 against the euro,

compared with $1.25 in March.

The weakness of the dollar, if sustained,

could force American consumers to get used

to paying more for many imported goods

as well as trips to their favorite vacation spots.

But there is also an upside: a weak dollar

could prove beneficial to the American economy

by aiding long-suffering manufacturers,

rebuilding a stronger industrial base

and lifting exports even if it makes life harder

for trading partners around the world, especially in Europe.

"As long as it doesn't crash, a gradual,

orderly decline is healthy," said C. Fred Bergsten,

director of the Peterson Institute

for International Economics. "The dollar went up

40 percent between 1995 and 2002,

so this is a necessary rebalancing."

It is a highly charged political issue,

and the sinking American currency

has already spurred attacks on the

Obama administration from Sarah Palin,

the former Republican nominee for vice president,

and others in her party who argue

that a weaker dollar points to a weaker America.

"We lose our position as the world leader

if the dollar is no longer the currency of favor,"

said Senator Jon Kyl of Arizona, the No. 2 Republican

in the Senate. He pointed out that he was

critical of George W. Bush for letting

the dollar fall, too, "but this administration

is making things worse by its spending and deficit policies."

Most ominously, many foreign central banks

are rethinking the dollar's status as

the world's premier reserve currency,

said Neil Mellor, a currency strategist

at BNY Mellon Global Markets in London.

That, in addition to domestic factors

like vanishingly low United States interest

rates and a ballooning federal budget deficit,

are exacerbating the dollar's downward movement.

In addition, while the Obama administration

maintains that it favors a strong dollar,

the White House has shown no sign

of taking any major steps to support the currency.

Whatever the politics, the economics are complex.

Over the long term, a weaker dollar

could narrow the United States's long-running

trade deficit, helping close the gap

between exports and imports,

as American products become

more affordable overseas.

But that comes at a price — higher costs

at home for imported consumer goods

as diverse as Italian suits, French wines

and Japanese stereos and cameras,

as well as more prosaic commodities like oil.

The dollar's drop is a key factor in oil's recent

rise back above $75 a barrel, which will

translate into higher gasoline prices.

The dollar has moved sharply before.

Most recently, it weakened in the summer of 2008,

only to strengthen drastically after

the collapse of Lehman Brothers a year ago

sent investors worldwide fleeing to

the relative security of American assets

like Treasury bonds.

Now, the political arguments over

the dollar's trajectory are accompanied

by a fierce debate among economists.

"Dollar weakness is a major problem

for American jobs and living standards,"

said David Malpass, a longtime Wall Street

economist who has been among the most

outspoken critics of the dollar's decline.

"As the dollar devalues, we have less capital

and purchasing power compared to

the rest of the world, and there is an increasing

risk of higher interest rates

and inflation," Mr. Malpass said.

But Mr. Bergsten argues the dollar is only

now getting back to a fair valuation

against other currencies if the United States

is going to continue to close its trade gap.

With the recent drop, he said, the dollar

is fairly valued against the euro but needs

to ease 10 percent against Asian currencies

like the Japanese yen to create

a level playing field for American business.

And for all the fluctuations against

the dollar by major currencies, the dollar

has not moved at all recently against

the Chinese yuan, which is managed

by Beijing in ways that allow

Chinese exporters to enjoy a weaker

currency and gain market share worldwide.

The Treasury secretary, Timothy F. Geithner,

has consistently said the administration

favors a "strong dollar," but currency markets

focus on the unlikely prospect of concrete action,

like an interest rate hike.

"The Obama administration may say

they want a strong dollar," Mr. Mellor said.

"But everyone knows they haven't got

the means to support it.

The Federal Reserve can't raise rates,

and the White House can't cut

the budget deficit anytime soon."

If the dollar does keep falling and

the euro keeps rising, it could increase

trade tensions with Europe, especially

big exporters like Germany, which have

already been hard hit by the global economic slump.

"The strength of the euro is coming

at absolutely the wrong time," said Jens Nagel,

head of the international department

of the German Exporters Association in Berlin.

"The U.S. is our biggest trading partner

after the European Union, and it's a big blow

to the recovery of auto companies

and industrial exporters."

Mr. Mellor predicts the dollar will keep

dropping, reaching $1.60 against the euro

by early next year, and there are signs

that even much bigger companies

than Eastman Machine are adapting.

As the global economy recovers and

international manufacturers ramp up output,

they are giving priority to their more

competitive plants, including those

in the United States, said Pierre Dufour,

senior executive vice president at Air Liquide,

a French supplier of industrial gases

to steelmakers, semiconductor firms,

and other industrial giants worldwide.

"It has two sides, like it always does,"

said Carl Martin Welcker, owner

of a machine tools maker,

Schütte, in Cologne, Germany.

"On the one hand, it makes our machines

significantly more expensive," said Mr. Welcker,

whose equipment churns out 80 percent

of the world's spark plugs. "On the other hand,

we're seeing international companies

move production back to the U.S.,

which helps our sales there."

Maïa de la Baume contributed reporting from Paris.

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