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."
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J-L K
Sent from Kigali, Rwanda
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