Against the mighty Romanian leu, the U.S. dollar has sunk by 15 percent over the past five months. That is no laughing matter for Mary Ann Bell of Middleburg, executive director of a charity called Romanian Christian Enterprises.
The weakness of the U.S. currency, Bell said, "has made a huge difference in our ability to care for poor people and abandoned kids." Although the charity's annual budget of about $300,000 is still adequate to fund a school for disabled children, the organization can no longer send a doctor into mountain villages to provide free medical care and pharmaceuticals. It has suspended the interest-free loans it used to give to Romanian families down on their luck, and it has cut back on the amount of firewood it distributes to households desperate for heat.
For Americans, a dinner in Paris or a stay in London is becoming more expensive, reflecting the rise in the euro from 86 cents in early 2002 to just below $1.35 yesterday.
(Remy De La Mauviniere -- AP)
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An extreme example, perhaps, but the charity's woes illustrate the far-reaching ramifications of the dollar's decline -- about 16.5 percent since its February 2002 peak against a basket of major currencies, and a fall that has been gathering momentum over the past several weeks. The currency's slide is being felt in ways as small as the rising price an American tourist pays for a plate of pasta in Rome and as large as the decisions by foreign companies to build factories in the United States as a hedge against fluctuating currency values.
For the most part, the cheaper dollar helps the U.S. economy by making American goods less expensive relative to those made abroad. But Americans like Bell cannot help but wonder how it can be good if their currency buys so much less overseas than before -- and many economists agree that the long-range implications may be wrenching.
The dollar's downward move, after all, stems from a massive imbalance in the U.S. economy, as reflected in the country's burgeoning trade deficit. Since Americans import more than they export -- the gap is running at about $600 billion a year -- foreigners effectively lend the difference, taking the dollars they receive for their goods and investing them in U.S. assets such as Treasury bonds. The net amount Americans owe foreign creditors has soared over the past eight years, to more than $3 trillion from $360 billion. The amount is equal to nearly 30 percent of the country's annual economic output. The more this sort of indebtedness rises, the more reluctant foreigners may become to continue buying dollars.
No one can predict how this process will unfold. It could come in the form of a sudden sell-off of U.S. stocks and bonds by foreigners, which could throw the world economy into recession. Or it could be much more gradual, with foreigners demanding higher yields on the money they invest in the United States, which could drive interest rates upward.
Even analysts who discount the odds of a crisis think the dollar is probably headed significantly lower in coming years. That is because its drop has shown no sign of shrinking the trade deficit to what economists consider a manageable level. As Federal Reserve Board Chairman Alan Greenspan put it in a speech in late November: "Given the size of the [trade] deficit, a diminished appetite for adding to dollar balances must occur at some point."
A Boon at Home
Already the stuff of tourist legend are the soaring prices of dinner in Paris or a stay in London, reflecting the rise in the euro from 86 cents in early 2002 to just below $1.35 yesterday and the rise in the British pound from $1.41 to just below $1.90 over the same period.
The flip side of that phenomenon can be seen along America's northern border, where Canadian shoppers have been snapping up goods made cheaper by the decline of the greenback relative to the Canadian dollar during the past 34 months. The Canadian dollar cost just under 83 cents yesterday, compared with 62 cents in February 2002. Luring shoppers are reports like one in Canada's National Post, which showed that a trip to malls near Buffalo could save them 20 percent on goose-down coats at Eddie Bauer and 23 percent on leather armchairs at Pottery Barn.
Far more important in economic terms is the reduction in the cost of U.S.-made machines, turbines and aircraft on global markets and the corresponding erosion in the competitiveness of similar goods made overseas. On this score, the dollar's descent has been a boon for the U.S. economy, fueling U.S. exports and prompting some foreign firms to move manufacturing operations to the United States. Small wonder that economic pundits have revived the words of John B. Connally, who as Treasury secretary during the dollar's great plunge in the early 1970s told foreign counterparts that the dollar is "our currency, but your problem."
