TOPICS > Economy

Falling Dollar

April 19, 2004 at 12:00 AM EST
Leaders of the industrial world met in Florida earlier this year to discuss international finances and exchange rates. Paul Solman reports from New York on the effects of the fall of the U.S. dollar against other currencies, the biggest currency trend of the past year.
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PAUL SOLMAN: At New York’s International Gift Fair this year, American vendors could afford to be playful.

VENDOR: No magic. Just a little bit of dexterity.

PAUL SOLMAN: American producers should have been upbeat. The U.S. dollar had been falling in value against the world’s major currencies, making U.S. goods and services cheaper, and thus more saleable abroad.

American consumers, meanwhile, stood to be hurt. A drooping dollar means that foreign imports should cost more, from Murano glassware to French candles, to the Middle Eastern oil that powers the boats that bring all this stuff to America.

Indeed, the story of currency exchange is a story of winners and losers no matter where you turn. Most of the sellers here were foreign. With rising currencies, they were afraid of becoming losers.

PAUL SOLMAN (translated from French): What happens with you when the dollar falls?

FRANCIS-CLEMENT DEVINEAU: I lose money.

PAUL SOLMAN: Francis-Clement Devineau explained that a few years ago, when the dollar rose against his currency, the euro, Americans could buy more euros per dollar, and thus more French candles, priced in euros.

FRANCIS-CLEMENT DEVINEAU: If the dollar goes up, I win money and I develop my business, of course.

PAUL SOLMAN: But the dollar has been falling now.

FRANCIS-CLEMENT DEVINEAU: Yes, so it’s difficult for us now.

PAUL SOLMAN: And it’s not just difficult for the bourgeoisie when the dollar buys less. You make that stuff, right?

CANADIAN VENDOR: Yes, we make that.

PAUL SOLMAN: The Canadian plastics man makes most of his sales in the U.S.

LES MANDELBAUM: And the Canadian dollar versus U.S. dollar has risen 25 percent in the past 12-month period. I’ve never seen anything like it in my business history. It’s dramatic.

PAUL SOLMAN: And it’s had a dramatic impact on Les Mandelbaum’s business.

LES MANDELBAUM: It’s very competitive in our industry, and now we’re making a lot less money. And the net effect of that is that we’ve had to rethink our production in Canada, and in the meantime, move production overseas. It affects people’s jobs, manufacturing jobs.

PAUL SOLMAN: It affects people’s jobs profoundly, and not just in France or Canada. The pound, like the euro…

PAUL SOLMAN: Pewter-maker Jason Sharp has watched the dollar fall against his currency, the pound. So this, this spirit flask, $14.

JASON SHARP: $14, yeah.

PAUL SOLMAN: This merchandise was made in Sheffield, England, famous here for its laid-off steel workers, featured in The Full Monty (movie), who gained a few pounds by losing their clothes.

PAUL SOLMAN: In the mid ’80s, when their steel plant closed and the movie takes place, $14 bought 14 pounds worth of British labor and raw materials.

By the time the movie came out, in 1997, $14 bought just ten pounds. Today, $14 buys closer to seven pounds, not quite enough to cover the costs of production. And if the dollar were to drop even lower?

JASON SHARP: Then we’d have to look at cutting back, and the first place that we would cut back on, unfortunately, is on the labor force.

PAUL SOLMAN: Thus it was that when Europe’s finance ministers met in Boca Raton, Florida, recently, they hoped to halt the dollar’s fall to preserve European jobs. And, they argued, to preserve Europe’s economic revival, so important to fueling the global economy. U.S. Treasury Secretary John Snow, to the right, was worried about U.S. jobs.

This has been an American theme at such meetings for the past few years: That a lower dollar would help us by making U.S. goods and services less expensive abroad. That would increase U.S. exports, help save U.S. jobs. Though of course, it means imports cost more in America for consumers.

In the end, given their conflicting concerns, the ministers issued a joint communique committing no one to anything about currency rates, much as similar meetings have been non-committal in the past.

Just as well, said most economists, because in the long run, not finance ministers but the fundamentals of supply and demand move the currency market, and seem to explain why the buck has buckled.

WOMAN: This is from Sicily.

PAUL SOLMAN: For example, this past year, Americans bought some $100 billion more worth of European stuff than Europe bought from us.

WOMAN: First of all, these are northern Italian…

PAUL SOLMAN: These Italian house wares were made by Italian workers, using Italian raw materials. So they were paid in euros, forcing importers like Francis Gravely to buy euros with dollars.

FRANCIS GRAVELY: Hand painted.

PAUL SOLMAN: The more people like Gravely buy, the greater the demand for euros. And since Europeans don’t buy as much from America, there’s less demand for dollars. The euro gains value relative to the buck.

PAUL SOLMAN: America’s huge trade deficit with the rest of the world, most economists think, goes a long way toward explaining our creaky currency. We Americans simply need more foreign currency to buy abroad than foreigners need dollars to buy American.

MARC CHANDLER: So someone calls in, says, “buy me 100 million British pounds,” you won’t even see them say the word “million.” It’s sort of understood. “100 pounds” is 100 million pounds.

PAUL SOLMAN: Marc Chandler runs the foreign exchange desk at HSBC, a bank based in London.

He says there’s another key influence on the dollar’s value: speculators. That is, investors trying to make a profit by betting which way our currency is headed. And the amounts of money being speculated with are a lot bigger than even the amounts used for trade.

MARC CHANDLER: Here in the foreign exchange market we’ve got a $1.5 trillion-a-day turnover, $1.5 trillion. That’s more… what we do in a week is what the world trades in goods in a year. So that means that the capital flows swamp trade flows.

PAUL SOLMAN: This explanation, as you might imagine, could get a lot more complicated. For instance, governments try to control their exchange rates by buying and selling here; speculators counter their moves.

KYOSHI NAKATSUI: We import a great deal of product from China. You know, all of us.

PAUL SOLMAN: And the biggest new player in the world economy, China, actually forbids the trading of its currency entirely. The Chinese have been selling everything from music boxes to high tech equipment in America, because their products are so cheap. They buy a lot less from us. That means the demand for Chinese yuan is higher than the demand for dollars. But if the Chinese allowed its currency to float, the teetering dollar would presumably take a great fall, investors might get nervous, and it would wind up hurting exports from China. Thus, says Kyoshi Nakatsui, who imports from China:

KYOSHI NAKATSUI: The Chinese currency is not traded worldwide, so they can put any value on it that they wish.

PAUL SOLMAN: So the yuan hasn’t risen against the dollar. Japan, too, tried to manage its exchange rate decades ago to keep the yen’s value low. But ultimately, market forces prevailed. The yen rose, and as expected, jobs left Japan. But Japanese consumers were winners. With a stronger yen, they were able to afford a lot more from abroad. Most economists think the same thing will eventually happen in China. If it keeps selling more to the world than it buys from it, the yuan will rise and Chinese consumers will be richer.

This raises one last point, though: Is there any way to guess what any currency really ought to be worth at any given moment? For our purposes, what the value of the dollar should be right now, considering that it recent weeks, it actually strengthened some. As it happens, economists do have a way of estimating a currency’s true value: With purchasing power parity.

TOM EASTON: It suggests that over time exchange rates should equalize, so it costs the same amount to buy something in New York as it does in Paris as it does in London as it does in Tokyo.

PAUL SOLMAN: Tom Easton works at the Economist magazine, which has come up with a simple way to measure purchasing power across countries: Its Big Mac Index.

TOM EASTON: The Big Mac.

PAUL SOLMAN: The Big Mac, and here it is. And why is this a good indication of price?

TOM EASTON: Because it starts with the package, it has the labeling, it has the sesames, it has the bread, it has the beef, it has the lettuce, and it has the pickle, too.

PAUL SOLMAN: Yeah, a pickle.

TOM EASTON: And, you know, once you go… and it has the cheese, which is a dairy product.

PAUL SOLMAN: Cheese, yes, back down under here, right.

TOM EASTON: So basically you’ve got a huge swath of products all in one little package that you… that is identical whether you buy it in Berlin or whether you buy it in Paris or whether you buy it in New York.

PAUL SOLMAN: So very roughly, a Big Mac should cost the same everywhere once you adjust for foreign exchange rates. If it costs a lot more or a lot less, that suggests the exchange rate may be out of whack. And today’s prices?

TOM EASTON: For an American, a Big Mac costs about 25 percent more in Europe than it would in New York City. And if you had done this same exercise a couple of years ago, you would have found the reverse: The dollar would have been overvalued compared to the euro.

PAUL SOLMAN: So when there were only 80 euros to the dollar…

TOM EASTON: Yeah.

PAUL SOLMAN: Your index told you?

TOM EASTON: It was time to go to Europe to have your Big Mac feast. Big Macs were basically cheaper in Europe than they were in New York. And it wasn’t just Big Macs, it was everything. And that’s when you saw all the American shoppers on the Champs D’Elysees.

PAUL SOLMAN: So the euro was too cheap in dollars then, according to the Big Mac Index, which is now suggesting it may be too pricey and the dollar too cheap, since the wheat, the meat, the land, and the labor should all cost roughly the same.

The Economist’s brand-new Starbucks Index tells the same story, at least in Europe.

TOM EASTON: In Europe, it costs about 33 percent. It costs about a third more to buy this tall latte than it does in New York City.

PAUL SOLMAN: Now the Economist indices are the roughest of indicators, but they do suggest that the euro may have overshot its fundamental value substantially relative to dollars. Has Tom Easton acted on this insight?

TOM EASTON: Yeah, I have. I was recently in Europe and I didn’t buy a thing. And then as soon as I got back to the airport in the United States, I just loaded up with whatever junk I could possibly buy.

PAUL SOLMAN: Unfortunately, most Americans don’t seem to be following Tom Easton’s lead.

Recently it was announced that the U.S. trade deficit had again risen, meaning we continue to buy more from the rest of the world than it buys from us, despite a lower dollar that makes our goods and services cheaper than they have been in years.