Finance ministers from the seven largest industrialized countries (the U.S., Japan, Great Britain, France, Germany, Italy, and Canada) met in Boca Raton, Florida this weekend to discuss exchange rates, especially in light of the falling U.S. dollar. While the dollar was already in decline at the last G7 meeting in Dubai in September, it has continued to tumble to the concern of European and Asian export markets.
Wall Street analysts, international investors and bankers pay close attention to the behavior of the U.S. dollar, recognizing the effects that its strengths and weaknesses have on the economies of the world. However, what does the declining dollar mean to the daily lives of normal people?
Since the currencies of the world float against each other, a drop in the value of the dollar generally equals a rise in the value of other currencies. The British pound is now at an 11-year high and the euro and yen have also both risen in value. The Australian dollar is growing stronger, (helping stem AU inflation problems). The Swiss franc, Swedish krona and Norwegian kronor are all at 7-8 year highs. This means that foreign imports will cost more to U.S. consumers, encouraging Americans to purchase more items "made in America." It also means that U.S. exports will cost less for foreign buyers, creating jobs as U.S. companies sell more goods to foreign markets. (Though China, with its artificially low currency, will remain a rough competitor.)
These simple results of the declining dollar can be good for the U.S. economy, but causes stagnation in European and Asian markets. Small businesses in Europe and Asia have been feeling the bite as their products become more expensive in American dollars and they find fewer buyers for their goods. American companies, on the other hand, are enjoying the perky U.S. economy.
At the same time, a falling dollar also equals a loss of purchasing power for Americans and for those holding U.S. dollars. Fewer tourists will want to travel to Europe for vacation this spring and summer, finding the exchange rates unfavorable to those with U.S. currency. German cars and Japanese electronics will become more expensive. In the long run, the inflation can cause many problems as Americans find their dollars buying less while their employers remain reluctant to increase their pay. Even the costs of American-made products may go up. As the prices of imports increase, American companies may take advantage of the weak competition to push up the prices on domestic products.
In the investment world, the weak dollar also can cause problems in the long run. Foreign investors are less likely to invest in US stocks because their value might go down over time. This means there will be less capital for young or expanding businesses. As bond prices fall, interest rates will eventually be pushed back up so that investors can make up for the loss in earnings.
At the moment, however, in the interest of jump-starting the U.S. economy, U.S. officials have shown little effort to fight the dollar's decline. The G7 finance ministers seemed to balk at the idea of intervening to bolster the dollar, even though they condemned the dollar's decline. It appears that the dollar will continue on its downhill trend for awhile longer.
Related Links:
• Dollar Slide Ignores G7 Warning - BBC News