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The dollar dilemma.

Byline: Claude Solnik

The U.S. stock markets are soaring. Unemployment has fallen toward the 4 percent that economists consider full employment. Throw in a huge corporate tax cut and whats likely to be tax decreases for many individuals. The U.S. dollar should be stronger than ever. Wrong. The buck has bucked this trend, getting weaker. One euro as of last Thursday was worth about $1.25 compared to $1.07 a year ago. The British pound sterling was worth $1.43 compared to $1.26 and the Canadian dollar was worth 1 cents, up from 77. The U.S. dollar has even weakened against the Chinese yuan, worth nearly 16 cents up from a little more than 14 cents a year ago. If the dropping dollar sounds like it might be worrisome (and some do worry), a debate is going on as to whether it may be good for some. Secretary of the Treasury Steve Mnuchin threw a pebble into the financial pool with global ripples a few days before the Davos meetings, suggesting the United States might favor weakening the dollar. The secretary of treasury says there are some good things about that. And there are. Its good for exports. It makes our goods cheaper to buy, said John Rizzo, chief economist for the Long Island Association in Melville. If he wants a weak currency, hell probably have some influence on that happening. Just as the Trump administration seeks to stem immigration, a weak dollar hurts firms abroad seeking to export into the U.S. making their products more expensive. A weaker dollar increases exports from the United States and the imports that other countries make of U.S. goods, said Herman Berliner, dean of Hofstra Universitys Frank G. Zarb School of Business. The bad news is all the products that we import will be more expensive. If youre an American company selling abroad, a weak dollar may be the cherry on the ice cream sundae of income tax cuts. A weak dollar makes it easier for U.S. producers to sell abroad and to compete with imports, said Laurence Krause, associate professor of economics at SUNY Old Westbury. It lowers the price of U.S. goods with relation to foreign goods.   Working the weak dollar Nobody wants to be or appear weak. And the United States government traditionally has favored a strong dollar as investors pay more for U.S. currency. The initial sense was with the United States being the greatest economy, you expect the U.S. to be strongest in everything, Berliner said. The reality is with a weak dollar, the opportunity to export more is beneficial to a significant number of industries. In order to understand why the dollar weakened, one might need to begin looking abroad as other economies grew, fueling demand for those currencies. One factor is strong global growth, people buying their products, Rizzo said. You have to get their currency to buy their products. That drives up the value of their products. The Trump administration sought to boost U.S. sales abroad, which benefit from a weak dollar. Comments like those by Mnuchin can further depress the dollar, although Commerce Secretary Wilbur Ross quickly reassured those eager for a powerful dollar. If the dollar depreciates too fast, if they try to talk it down or intervene in the markets to make it weaker, they could have problems if speculators start selling dollars, Krause said. Then you could have a collapse in the currency. Thats probably not in the cards. Krause said governments can raise interest rates to induce capital inflows and strengthen the domestic currency or lower rates to lower the dollar. If the U.S. government was serious about weakening the dollar, policy makers would sell dollars on currency markets and lower U.S. interest rates, Krause said, although interest rates are likely to rise.   The other wall While there has been much talk about building a physical wall on the U.S. southern border to stem immigration, a weak dollar can have the same impact on products. A weak dollar essentially builds a trade barrier for firms abroad seeking to sell into the United States by making their product more costly. A weak dollar is in line with tariffs imposed on foreign-made goods, in that it makes products from abroad costlier in the United States. The Trump administration recently imposed a hefty tariff on washing machines and solar panels made abroad to boost U.S. production. What happened on the tariff on washing machines? Berliner said. The imported washing machines will be more expensive. While both the weak dollar and tariffs on imported products may help put America first in production, theres a question as to whether they will put Americans first. The weaker dollar will impact the entire U.S. economy, Berliner said. It will be an extra cost burden that all of us will end up paying. Theres no way around that. Its the good and the bad of a weaker dollar. A weak dollar could be good news for multinational U.S.-based companies that do business abroad. On Long Island, firms like Henry Schein and Hain Celestial, with big sales abroad, could come out ahead. As Long Island is a tourism destination, local businesses could gain, said Timothy Speiss,partner in charge of EisnerAmpers personal wealth advisors group and chair of the firms Asia practice. Further, as Long Island is the home of companies that export goods, and are multinationals, these companies and their employees could do well. As traveling becomes more expensive for Americans abroad, Long Island and the United States become cheaper for foreign tourists. Tourism is an important industry on Long Island, Rizzo said. To the extent we have foreign visitors a weak dollar is good for that. Citizens abroad might see this as a window to buy U.S. real estate and businesses, further increasing the foreign ownership of U.S. firms and real estate.   How we got here The U.S. dollar hasnt been weak for long: It strengthened, even as the U.S. economy foundered. Although the U.S. economys meltdown weakened the dollar, the dollar rebounded amid a global meltdown. If they didnt have dollars and there was a currency crisis, they were in trouble. The currencies collapsed, Krause said of other nations. You needed a lot more reserves. You have to hold a lot of dollars. The dollar strengthened as China sought to depress its currency, to boost global trade, and other nations grew their dollar reserves. Currency crises in Mexico, Thailand, Iceland and Venezuela all attracted people to the U.S. dollar for security. But if the dollar provided security, global economies started growing, the euro recovered and the dollar began to drop. Even China, which controls (some prefer the word manipulates) its currency, put the brakes on devaluation. There was pressure on the government to revalue the currency, make it stronger, Krause said of China. It had all these trading positions. While local companies could see sales abroad rise due to a weak dollar, Long Islanders could pay more for products here. All of us buy a significant number of imported products, Berliner said. Those prices will go up. If a trade war ensues following U.S. tariffs and a weakening dollar, China could retaliate and Europe could take steps. While that might not occur, many economists believe the rest of the world wont simply watch what happens. The net result will be impossible to predict, Berliner said of the worldwide impact of a weakening dollar and rising tariffs. We have no clue yet as to the level of retaliation. We are fairly certain that other countries wont sit idly by as the dollar weakens or we institute more tariffs.   Talking down the dollar While Secretary of the Treasury Steve Mnuchin recently said a weak dollar isnt all bad, this isnt the first time that a U.S. administration has talked up the benefits of a weak dollar. President Jimmy Carters administration sought to weaken the dollar, talking the currency down and otherwise seeking to lower its value against other currencies. But this is a delicate balancing act. Its like talking down a stock, Laurence Krause, associate professor of economics at SUNY Old Westbury, said. Expectations; confidence. If you start talking down something, the markets could get nervous and start selling. The Carter administrations actions led to an overreaction that sent the dollar tumbling, forcing the U.S. then to rescue the dollar, Krause said. President Ronald Reagan, meanwhile, favored a strong dollar, which made it tough for U.S. firms to sell abroad and easy for foreign firms to export to the United States. There was a huge over valuation of the dollar in the 0s, Krause said. You had huge trade deficits develop. The Reagan administration finally sought to address this problem, helping stabilize or at least bring down the dollar. Mnuchins praise of the weak dollar could spook some currency speculators who buy dollars in the hope that they will go up in value. I imagine it makes the markets nervous, Krause said. They dont know what to do. If youre a currency trader, you may hedge your bets, take another currency instead.  

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Publication:Long Island Business News
Date:Feb 2, 2018
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