Weakening U.S. dollar takes a pounding in overseas markets
By John Waggoner
USA Today
The dollar is so weak these days that panhandlers have started asking if you can spare a euro. It's so weak that Starbucks charges $10 a cup in Paris. Coffee costs $20 extra. Weak, weak.
The dollar has indeed taken a pounding this year. Aside from the pinch it gives U.S. tourists, though, is a weak dollar all that bad? Yes and no. In some ways, you can gain from a weaker dollar, provided you don't spend all your profits in France.
You'll need to plunk down $1.47 to buy 1 euro, the pan-European currency, compared with only 83 cents in October 2000. The dollar has fallen about 11 percent against the euro this year.
The euro isn't the only currency that's been smacking the buck. It takes $1.07 to buy a Canadian dollar and $2.11 to buy a British pound.
If you go to Europe, you'll feel the pain. A 5-euro latte at Starbucks will set you back $7.35. And higher prices for tourists aren't the only fallout from the weaker dollar. Here are some other consequences:
So imports are more expensive, exports are cheaper — doesn't it all come out in the wash? Not necessarily. "You can't devalue your way to prosperity," says Ronald Simpson, managing director of global currency analysis for Action Economics.
A lower dollar could, eventually, lead to lower living standards in the United States, says Sudi Mariappa, managing director at Pimco. "Our wealth as a nation — what we can buy on a global basis — will fall," Mariappa says.
If the dollar falls too far, imports could become prohibitively expensive. Should the Canadian dollar rise too high, "You won't be able to import a toothpick from Canada," says Action Economics' Simpson.
Already, consumers are feeling the squeeze. Richard Bernstein, chief investment strategist for Merrill Lynch, gives an example: the price of a New York hotel room. "A European vacationer has seen no change," because of the tumbling dollar, he says. But a U.S. tourist would be hard-pressed to find a decent place in Manhattan for less than $400 a night.
If the dollar avoids a sudden plunge, then the changes we feel in the U.S. will be gradual. What Wall Street fears is a collapse of the dollar — a short, steep decline in the dollar vs. other currencies. If that happened, the Federal Reserve might have to raise interest rates to prop up the dollar. Higher rates, in turn, could slow the economy.
