Archive for Friday, February 4, 2005

Weak dollar means higher prices for imports

February 4, 2005


— The once high-flying U.S. dollar, which has been dropping during the past three years, is likely to lose more altitude in the months ahead.

For consumers, that could mean higher prices for imported shoes or wine or that vacation in Europe. The picture would be rosier for U.S. manufacturers, whose goods would be less expensive for foreign buyers.

Experts are hoping that any further declines in the dollar will be gradual. A freefall would have dire consequences for the overall economy.

"There are no magic bullets if the dollar were to seriously tumble," said Stuart Hoffman, chief economist at PNC Financial Services Group. "You can't reach into a bag of tricks to quickly make it stop."

But he's not ready to expect the worst, at least for now.

"I don't think the dollar is going to fall off a cliff," he said, noting that the Federal Reserve's rate-raising campaign would help support the dollar.

Currency issues are likely to be discussed at a meeting of finance officials from the world's richest nations beginning today in London.

Since its peak in early 2002, the dollar has fallen about 15.2 percent against a broad basket of currencies, according to one barometer.

Thus far, U.S. consumers haven't seen prices for imported goods -- from cars and clothes to TVs and toys -- go up sharply.

One factor behind that: The dollar's slide has been most pronounced against European currencies. It hasn't fallen much against currencies in Asia -- the source of most of the imported goods that America loves. China's currency, the yuan, is pegged to the U.S. dollar, and that's keeping a flood of inexpensive Chinese goods flowing into the United States.

Another factor: Foreign companies eager to sell goods to Americans have been reluctant to jack up prices and are using profits to absorb some of the impact instead, economists say.

"Mercifully, consumers haven't really seen the negative side of the dollar's slide so far," said Rajeev Dhawan, director of Georgia State University's economic forecasting center. "Even with the dollar down, you haven't heard horror stories about things getting very expensive. Foreign companies are absorbing some of the impact -- first taking a hit out of profits, then squeezing labor and boosting productivity."

But that can't go on forever.

To be sure, prices of goods imported into the United States are rising. Import prices -- including crude oil -- rose by 6.9 percent in 2004, the largest increase since 1999, Labor Department figures show. Much of that reflected higher petroleum prices.

Economists believe that in the months ahead, the dollar likely will weaken a bit more -- mostly against the euro, the currency used by 12 countries.

The dollar hit a record low against the euro at the end of December, when it took $1.37 to buy one euro. That represented a decline of about 14 percent from just three months earlier. These days it takes about $1.30 to buy one euro.

The sinking value of the U.S. dollar partly reflects investors' fears about the big U.S. trade and budget deficits.

America's trade deficit surged to an all-time monthly high of $60.3 billion in November. Even with the drop in the dollar, exports fell while imports rose sharply.

"Trying to turn the trade balance around is like trying to turn an aircraft carrier or oil tanker around," said Frank Vargo, vice president for international affairs at the National Association of Manufacturers.

Translation: It takes time.

The U.S. budget deficit, meanwhile, climbed to a record $412 billion last year. The Bush administration pledges to cut the deficit in half by 2009.

These swollen deficits eventually could threaten the economy by souring foreign appetites to invest in the United States, Federal Reserve Chairman Alan Greenspan has warned.

So far, foreigners are willing to lend the United States money to finance its twin deficits. The worry is that at some point foreigners might suddenly lose interest in holding dollar-denominated investments.

That could cause them to unload U.S. stocks and bonds, which would send their prices plunging and interest rates soaring.

Economists say the U.S. trade situation is unlikely to improve significantly unless China stops pegging its currency to the dollar and lets it be set by market forces. U.S. manufacturers contend that China's currency is undervalued by as much as 40 percent, giving Chinese companies a big competitive advantage over U.S. companies.

Sens. Charles Schumer, D-N.Y., and Lindsey Graham, R-S.C., introduced legislation Thursday that would place a 27.5 percent tariff on all Chinese goods coming into the United States if China did not make significant progress toward revaluing its currency.

"Forty percent of the U.S. trade deficit is against Asian countries, a significant number of which have inflexible currencies," says Sheldon Engler, an economist at Charles Schwab Investment Management. "About 25 percent of the U.S. trade deficit is against China."

The Bush administration has been pressing Beijing to move toward a flexible currency system. The world's most industrialized countries have been calling for all nations to do just that. They are likely to state that desire again at the London meetings.

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