Cash and carry: The decline in the dollar is hardly a cause for concern

The Times (U.K.) ^ | 06/29/2002 | editorial board

[Pokey78]

Like a scorpion in a bottle, assisted by some external intervention, the dollar fought yesterday to avoid parity with the euro. It closed in London at 0.9862, a rate which sounds like one for one to the layman and which may well be realised in practice next week. The dollar has fallen against other major currencies pretty consistently since February 1. That slide, while notable, is not catastrophic. The greenback is stronger than it was four years ago. While the workings of the foreign exchange markets might seem arcane, this movement is at least as important as other economic stories this week, be they the WorldCom scandal, the Chancellor’s Mansion House speech, or local property prices. And the fall in the dollar’s value has the merit of being essentially benign.

There are two prominent schools of thought on these issues, neither one of which has much to recommend it. One is that the relative worth of any national currency is a sort of virility symbol; it must be maintained at the highest possible rate or else humiliation will follow. The second prefers crude opportunism to misplaced pride. This camp would look for the chance to encourage strategic devaluation at every opportunity — aspiring to talk down a currency with the aim of boosting short-term growth courtesy of artificially inexpensive exports and unduly uncompetitive imports.

It is a matter of debate as to whether the misguided patriot or the malign parasite is the more misguided. The logical approach, however, is simply to acknowledge that the price of a money, like the value of any other good, should change from time to time in response to supply and demand, or even fashion. The past five years have witnessed a strong dollar primarily because US economic growth has been so much more powerful than any of its competitors. The American economy is far from on its back now, but nonetheless some correction was expected.

Provided that this slip does not become a slump then a different balance of exchange rates should assist the world’s main players. The fact that US exports will become much cheaper could provide companies with meagre profit margins with more flexibility. The large US trade deficit may fall and American manufacturers, who have been obliged to work with an exceptionally strong currency, will see greater benefits from embracing new technology and other productivity improvements. A more robust US economic performance still over the next year would be a positive outcome for more than Americans themselves.

If adapted to properly, the weaker dollar should be welcomed in Europe as well. The recovery of the euro means that the price of imports into the EU will fall and that oil (priced in dollars) should become less expensive. Both trends mean that eurozone inflation, which is not especially high anyway, will be yet more vigorously contained. If the European Central Bank (ECB) possessed any imagination, such a backdrop would be seized upon for policy innovation. The idea that the ECB could be seriously considering an interest rate rise in the near term, ignoring fragile growth in France and Germany, defies rational comprehension.

In Britain, the impact of all of this will be more modest. Sterling has appreciated quite sharply against the dollar (to the relief of holidaymakers destined for Florida) but the shift compared with the euro had not been as dramatic. This state of affairs, which provides mild relief to manufacturing industry without a serious threat to inflation, is unlikely to disturb the Bank of England.

None of this will satisfy the patriots or parasites. It is not the task of foreign exchange dealers to provide either section with succour. The dollar is not dead, it is just resting. Central banks and companies should make the most of this trend while it lasts.