The sinking dollar, as viewed from overseas

Photo: Philip Brewer

To someone in the US, the decline in the value of the dollar has mainly made itself felt up to now in the form of increases in the prices of globalized commodities--everything from oil to nonfat dry milk. Consumer goods, even though many are imported, have only just very recently begun to show price increases. When you look at the picture as viewed from overseas, though, it's not as simple as just seeing the reverse.

The most straightforward effect of of a lower dollar is that stuff manufactured in the US would be cheaper overseas.

What, you may ask, is manufactured in the US anymore? Actually, quite a bit. The US still exports hundreds of billions of dollars worth of jet airliners, computers, telecommunications gear, and industrial machinery (together with parts for all those things). There are also thriving US industries selling things like chemicals and plastics. There's even good sales of consumer goods--especially medicines, but also toys, games, sporting goods, musical instruments, etc.

All that stuff, together with agricultural goods, has added up to some $850 billion so far this year. Which means, since those dollars are down from €1.00 for a dollar to just €0.67 over the past 5 years, all that stuff is on sale. (The dollar is down similarly against the Canadian dollar over the same period from close to $1.60 Canadian to about $1.00 now.)

So, on the one hand, with all that stuff on sale, you'd expect to sell more. And we are selling more, but only to a modest extent, due to the many delays and complications inherent in trade. (How many jet airliners that US companies sell depends more than anything else on how many were ordered over the past couple of years. Drug sales are mainly a function of the latest medical research on the best treatments for various conditions and how many people have those conditions.) Being able to get them with cheap dollars will change things around the margins, but even for things where price changes make an immediate difference in how much people want to buy, there are still manufacturing constraints, shipping constraints, and so on.

Even so, to the extent that US companies still make stuff--and that's a considerable extent, despite globalization and outsourcing--those companies can now sell stuff cheap enough that they can really compete.

What that means is that, where there's a direct foreign competitor, that competitor is now comprehensively screwed. Just like US companies, those companies have already outsourced as much as they can. Any work that hasn't been outsourced has only been kept because the skill set just doesn't exist overseas or national policy requires that it be kept. So, with US companies being able to pay their workers with dollars that are only worth €0.67, European, Canadian, and other manufacturers are facing some serious competition.

Of course, this requires that the US company actually be a competitor. This means, for example, that Airbus is in more trouble than, say, Toyota. (The yen is actually not up nearly as much against the dollar.)

To the small company that's providing goods and services for the local market, this isn't so bad. They were already competing with all the usual globalized suspects; giving the US an extra 30% edge doesn't help, but any market where it would make the difference has probably already been grabbed by some much cheaper global player.

For the major European and Canadian companies doing business in global markets, though, this is very bad news.

Of course, major companies have large tax bills and large workforces. A drop in business would lead to lower tax revenues for the countries. It would also lead to layoffs--layoffs of voters. Those realities are going to put serious pressure on governments to "do something" about the value of the dollar.

What can be done? Well, any central bank can hold the value of its currency down as low as it wants, if it's willing to buy an arbitrarily large amount of the other currency. That's what China has been doing for years now. The result, though, is inflation. The other central banks can join the game, if they want. They probably don't. In fact, even China is getting out, having decided that it's really got all the dollars it wants.

Beyond that, there will be political pressure brought to bear, but it's hard to bring that sort of pressure to bear on the US. A falling dollar makes Americans poorer in some sense, but not in ways that prompt ordinary people to demand better from their government. In the old days of the gold standard, the pressure would appear in the form of foreign sellers demanding actual gold instead of mere paper, the excess paper money that leads to a collapsing currency would be automatically curtailed. Nowadays, though, the pain of a falling currency is very much spread around--foreigners suffer about as much as Americans, and neither suffers so very much as to make the value of the dollar a major political issue.

Things will likely go on as they have, with people who have dollars trying to find something of value to spend them on. Once you've bought all the jet airliners, network switches, and soy beans that you want, you're pretty much down to buying stuff for investment. US treasury securities have been a popular choice, but US interest rates are now low enough that they wouldn't seem particularly attractive, even if they didn't face the obvious problem that your investment would still be in US dollars. US companies, with the credit problems stemming from the housing bubble and subprime loan debacle, should only be bought with a keen understanding of the underlying business. Still, there's plenty of other stuff worth buying in the US--land, for example. There's lots of that going on.

There's a lot of anxiety about this issue. The US dollar is important enough in world trade, that if it keeps going down, trade will become disordered. There are enough dollars in the hands of people all over the world--foreign governments and their central banks, major corporations, wealthy individuals--that there's a serious incentive for them to get their governments to do something. And there are plenty of theories about just how bad that something could turn out to be. Personally, though, I don't find any of the doom scenarios very compelling.

A complete collapse in the dollar is unlikely, because there's so much stuff you can buy with dollars that the currency will continue to have some value--it won't go straight to zero. Further, its slide in value is self-limiting because eventually both voters and the wealthy elite in the US will insist that it not fall further.

The individual outside the US is really a bit player in this. You're mostly not in a position to buy farmland in the US or hedge your future purchases against currency fluctuations. If you work for a multinational corporation that pays its workers in some currency other than the dollar, but which competes with companies that do pay their workers in dollars, you might want to be a bit worried about your job; even if jobs aren't lost, raises and promotions are going to be harder to come by. Beyond that, enjoy the occasional cheap thing you can get that's made in the US.

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Guest's picture

We can thank the foreign economies and the sinking dollar for keeping stock values up. All the real growth is coming from sales abroad. I've always maintained that investing in big multi-nationals is an indirect play in the currency markets. Companies that do a great deal of business abroad are currently getting paid in everything but the worthless dollar and reaping the rewards.

If the bond market is a leading indicator/predictor of future interest rates then you could reasonably expect another rate cut by the Fed mid December. What does that mean? It means our good old American dollar will devalue some more and oil prices will go up some more.

Guest's picture
Jon A

I wonder about the degree to which rising oil prices have directly impacted the 'sale' price of US goods. Here in NZ, the price of gas has gone up $.20 (in NZ dollars) per litre in the past three months. Grapes from the US are still $6.99/kilo. When I've just paid $90 to fill my tank, given the choice between cheap(er) local fruit and expensive imported grapes (or peaches or nectarines) my kids are going to be snacking on NZ apples.

There's also a developing, but very strong, 'Buy NZ' ethos here. I wouldn't say that people see the US as the kind of threat people in the US see China, but it's pretty darn close. Thanks to America's tarnished image, the appetite for American products here has diminished--except for products like the Holden, which people don't recognize as being made by an American company. I wonder too, then, about this phenomenon elsewhere affecting the attractiveness of US goods.

One last point: Many overseas employees (or contractors) of US companies are not paid in the local currency, but paid in USD. (I know, my wife and a few of her friends are some of them!) We've seen our income rise nearly 15% only to fall back again within the course of three months. Our friend in Sweden has lost more than 20% of her income this year. We're not talking about the vicissitudes of the value of a stock portfolio, but people's day-to-day incomes. This is bad, bad, bad for the US (and their employees). They are losing their edge, not gaining one. If the US dollar falls another 10% against the local currency, my wife will no longer have any monetary incentive to continue to take contracts from her American employer. An interest rate cut will only exacerbate this, since we can get 7%-8% on a regular savings account here.

Guest's picture

Unfortunately there are more significant effects to the declining dollar. A week ago a microphone accidentally left on discovered OPEC was actually discussing the weakness of the Dollar and the option to price oil in a different currency, mainly the EURO.


That same weak Iran's president Ahamdinejad called the dollar a "worthless piece of paper" and suggested pricing oil in another currency.


There is a possible bright side to this. As oil and energy prices soar the search for alternative energies to fossil fuels may accelerate and Americans may start to ponder why they are so dependant on Gulf States and Russian oil.


Dorian Wales

Personal Financier

Philip Brewer's picture

Thanks for the good comments.

Yes, people who live overseas but get paid in dollars are in the worst shape. The ideal situation right now would be to live in the US but earn a fraction of your income in a foreign currency. (Actually, living wherever you think of as home is always best, but having a fraction of your income from a foreign source paid in a foreign currency substantially increases the stability of your income stream. If only it were easier to do.)

I've been expecting the rising price of inputs to start working its way through other prices for months now, and it is finally happening, especially in food. For manufactured stuff, it's still in the early stages, but I think it's bound to grow.

That's going to put the Fed in a predicament. They'll be doubly discouraged from cutting rates (because it would both weaken the dollar and feed inflation), but those same rising prices will also weaken the economy and make raising rates almost unthinkable.

Frankly, I think a lot of the Fed's "success" over the past 20 years has been due almost entirely to the effect of globalization on prices. With that string having just about played out, we're likely to start seeing the inflation that was hidden by offshoring manufacturing, but since it's 20 years of accumulated inflation, it's not going to be at all easy to put a stop to it.

I'm unconcerned about whether oil is priced in dollars or not. The price of oil is set by the market, and whether they price it in euros (and hold it steady as the dollar drops) or price it in dollars (and have it go up as fast as the euro rises) makes no real difference.

Guest's picture

I guess people living in the states will be worried about getting poorer. Well that's true if you compare yourself to other countries strictly by purchasing parity. That's not entirely true if you live in the states. In terms of what goods you can purchase in the states it's not that bad. The states still has one of the highest living standards in the world. You will become poorer if inflation starts rising (hopefully the fed will keep it down).

As someone living overseas (Australia) you could believe all the doom and gloom news or you can see opportunities. Assets in the states are about 20% cheaper than they normally are (dollar movements). Why not buy a piece of company in the states? It's on sale. I'd prefer to own solid company in the states than a dodgy one somewhere in asia.

America has a lot of good things going for it. Two party democracy, rule of law, entrepreneurial spirit, mostly honest leadership. I bet you in 10 years the dollar will be higher and so will the stock market.

The same cannot be said of a lot of emerging economies. Dictatorships, cronyism, poor rule of law, fragile institutions. People who have come from these countries know this. That's why they emigrated to countries like the states.