Dollar Devalued

On Oct. 21, the U.S. dollar dipped below the $1.50 threshold against the euro for the first time in 14 months, marking a 20% decline since last March. And it’s not over; experts predict the dollar’s precipitous decline will continue, possibly reaching $1.60 by early next year.

In the world of finance, some will be pinched by the drooping dollar while others will benefit – a devalued American currency does not equal a falling sky for everyone.

Some experts, such as C. Fred Bergsten, director of the Peterson Institute for International Economics, even claim that an "orderly decline" is healthy for the U.S. economy. The dollar rose 40% in value between 1995 and 2002, and Bergsten sees the current downturn as little more than a natural rebalancing.

From the dollar’s 2002 high, where one dollar purchased 87 euro-cents, its current value at 67 euro-cents does appear ominous. But in fact, it’s no worse than similar value cycles witnessed in the 70s and 80s.

Further, a weakening dollar could signal a brighter outlook for the future of global stock markets. When the worldwide financial crisis deepened last Fall, foreign investors fled to the relative safety of U.S. government securities, chiefly Treasury bonds, which drove the value of the dollar up. Now, as financiers regain confidence in world markets and diversify into riskier assets, the dollar’s value is returning to earth.

And long-suffering U.S. manufacturers and exporters certainly aren’t complaining. The dollar’s slump makes American goods effectively cheaper in the global marketplace, which will help narrow a bloated U.S. trade deficit and create a more sustainable economic future for the EU’s largest trading partner.

So what are the downsides?

Well, for near-region economies exporting outside of the EU zone – such as market leader Germany, with its sizable trade surplus – the dollar’s decline has made a nascent European economic recovery all the more tenuous. Prices for EU exports have risen along with the value of the euro, driving down global demand.

But Germany’s export-heavy economy has so far weathered the storm – those hit hardest by the devalued dollar are its less-competitive allies in the EU zone, such as France, Italy and Greece. While the new center-right coalition in Germany aims to curtail its budget deficit, governments in Europe’s south have reacted by raising theirs. French President Nicolas Sarkozy recently withdrew his claim that the French budget deficit would be reduced to 3% of gross domestic product by 2012.

In Washington, D.C., the dollar’s strength remains a highly charged political issue for the President Barack Obama. While the Obama administration publicly supports a stronger dollar, most experts (including his domestic political opposition) suggest they have neither the political will nor the effective means to do anything about it. Congress can’t cut the $12 trillion budget deficit, and the Fed won’t raise historically low interest rates while 9.7% unemployment numbers hold.

So for now, the dollar’s slide looks to continue. For better or worse, the effects of its decline will likely be further exacerbated.