Dollar has been beacon of strength in weak economy
NEW YORK — Would the U. S. economy be better off if the mighty dollar weren’t so mighty?
The dollar has strengthened against most other major currencies for much of the second half of the year. It recently reversed course, but the big picture remains the same: The Thomson Reuters U. S. dollar index, which measures the dollar’s value relative to the euro and the Japanese, Canadian, British, Swedish and Swiss currencies, is still up more than 10 percent from its lows in March.
All the while, the economy has been wallowing in a deepening recession.
Does the strong dollar have anything to do with the nation’s economic woes? What would be better for the economy right now — a stronger dollar or a weaker one?
Here are some questions and answers about the strength of the dollar:
Q: Should we be rooting for a stronger or weaker dollar right now?
A: In a broad sense, a weak dollar is probably favorable while the economy is ailing, since it would make U. S. goods cheaper to consumers outside the country.
“The dollar is really a shock absorber,” says Brian Bethune, economist at IHS Global Insight. “When domestic economic conditions are weak, it goes down to stimulate demand for U. S. product overseas.”
Q: So why have we seen such dollar strength in recent months?
A: The dollar, which had already been on a multiyear losing streak, began to weaken further in late 2007 and early 2008 as it became clear the U. S. was heading into a recession. But as the global economic outlook soured, investors flocked to the safest assets around: U. S. Treasury bills, notes and bonds. (In other words: investments in U. S. government debt.)
Because Treasury investments are denominated in dollars, this trend pushed up demand for greenbacks — and more demand translates into a stronger dollar.
Q: How has that hurt the U. S.? A: The stronger dollar has come at a bad time. It made U. S. goods more expensive overseas as the economies of many major U. S. trading partners are mired in recession. That has weakened the demand for U. S. goods, which has caused exports — a rare bright spot in the U. S. economy earlier this year — to fall hard.
The drop in exports could lead to more job losses, at a time when employment is already declining at the fastest pace in decades.
Q: But doesn’t a strong dollar help by making imports cheaper?
A: Yes, and we’ve seen import prices fall hard, too. Especially for one of the country’s favorite imports: oil.
