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THE HIGH VALUE OF THE DOLLAR – GOOD OR BAD FOR AMERICA?

March 30, 2015

THE HIGH VALUE OF THE DOLLAR – GOOD OR BAD FOR AMERICA?

2015 will be a great year to visit London, Paris or most anyplace else in Europe. Why? It is because our dollar is more valuable as against the pound and euro and other non-euro currency than it has been in years. The dollar buys a lot more of such currency than before, and a vacation to such a venue is accordingly cheaper.  I think we will see more American tourists in Europe this summer than usual as a result, and that is good for the tourism industry both here and abroad. However, tourism is just one part of our own economy, and the spectacular fall of the euro and rise of the dollar to the tune of 12 percent since the beginning of the year hasn’t had overall beneficial effects on our economy. As usual, it depends upon where you sit in this global economic complex, which involves much more than tourism.

Thus from the standpoint of Europe, if a fall in the euro is regarded as a measure of the soundness of its economy it may sound bad, but is it? I think not, and why not? It is because the fall in the euro’s value makes European exports much cheaper for overseas customers, which will result in a growth surge in the economies within the eurozone.  BusinessInsider.com, for instance, reports that “French and Italian cars, German machine tools, and Irish drugs” have all become dramatically more affordable in the last few months. It is therefore clear that the eurozone economies that have been struggling with recession for the past few years welcome the weaker euro as the continent’s best hope for economic growth at the present time.

As their recovery proceeds, I would expect new strategies to be put in place to maintain their competitive place in the market, one of which would be to raise interest rates on their debt, which would tend to cause an increase in the value of both eurozone and non-euro currencies, but right now a lot of guesswork is involved in forecasting just when that point will be reached. I am of the view that the value of one’s currency in isolated context is not so important as its effects on the economy, and the countries in the eurozone apparently agree since their European Central Bank has for some time now been emulating our Federal Reserve in printing money and buying great quantities of bonds, a policy that has resulted in a fall in interest rates across Europe, sometimes even into negative rates of return.

With our slightly improving economy and an upward creep in short-term interest rates (a U.S. ten-year bond that pays 2.1 percent versus a German bond that pays 0.25 percent, for instance), guess where European investors are placing their money? Capital has been fleeing Europe to American bonds by the zillions. Result? The euro has fallen by 24 percent as against the dollar in less than a year. Further result? Cheap vacations to Europe for Americans.

This is expressed in real terms as follows: With the euro in free fall due to European Central Bank policy as set forth above, last year the euro was valued by as much as $1.39 and it is now trading at or about $1.05, the lowest in 12 years, and some economists predict the euro will continue its descent in value and slide down all the way to parity before this year is over. Some even forecast that the euro will slide down from parity to as little as 85 cents by 2017! Hmmm. Perhaps American tourists should delay their European vacations a bit and await a real bargain!

So where does the American economy fit into this discussion of European recovery and tourist bargains? Unfortunately, the high relative value of the dollar leaves us exposed to a downside in growth and perhaps increasing unemployment and reduction of aggregate demand. How so? The flip side of a stronger dollar is that our exports (14 percent of our economy) are much more expensive for international consumers which means that we will necessarily export less, and if our corporate masters here decide to cut back on employment due to such decreased demand, our own delicately positive economic recovery could be derailed since we are not yet out of the woods from Bush’s Great Recession.

The problem in policy choice is this: That if the Fed increases interest rates (as I have often favored), we may bring more money into our federal bond coffers but also increase the value of our dollar even further and slow our own pace of recovery since adoption of such a policy would be a drag on both inflation and potential for economic growth.

Given such a situation, we are at a crossroads in determining policy, and while I have frequently blogged that the Fed should raise rates, I must reluctantly for the present back off from favoring that policy so that we can slow if not stop the rate of increase in the value of the dollar in order to keep our weak but hopefully continuing recovery afloat.

Cheap European vacations are great, but not as great as our economic recovery with a booming aggregate demand and a demand for labor that will end wage inequality and lead this country down the road to prosperity for all, which is my ultimate hope and goal.   GERALD   E

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