The dollar's in the dumpster, and nobody's worried -- for now
"A strong dollar is in America’s best interest," the Bush and Obama administrations have repeatedly assured us.
And yet for most of this decade the dollar has been sliding. Now, the greenback again is one of the world’s currency weaklings. But global financial markets, and governments, seem to be taking it in stride.
The dollar has taken a renewed pounding over the last two weeks, driving the DXY index -- which measures the buck’s value against six other major currencies -- to nearly a one-year low.
The euro has been the big winner as the U.S. currency has lost ground. The euro was at $1.47 on Thursday, its highest level since last September and up from $1.42 on Sept. 1.
But the dollar’s troubles haven’t set off alarm bells in Washington. Nor have the Chinese raised a new stink about the buck’s weakness and the devaluation threat it poses to their American asset holdings.
For one, investors worldwide are feeling better about the global economy, which is pulling money out of the classic hiding place of the dollar in favor of riskier assets, including emerging-market stocks.
"A lot of money is coming out of safe-haven dollar bets," said Michael Woolfolk, senior currency strategist at Bank of New York Mellon.
Investors and traders also are reacting normally to the interest rate differential between the U.S. and other countries: With U.S. short-term interest rates lower than those of most other nations, and the Federal Reserve in no hurry to raise them, the dollar naturally is at a disadvantage to currencies in countries with higher rates.
Yet even as the greenback has lost ground in recent weeks, there doesn’t appear to be a rush out of U.S. Treasury bonds by foreigners whose assets are devalued with each tick lower in the dollar. The yield on the 10-year Treasury note, at 3.39% on Thursday, was unchanged from its level on Aug. 31.
What's more, Wall Street has continued to rally, pushing major market indexes to 11-month highs.
The dollar's decline "doesn't seem to be impacting U.S. stock or bond markets," says Sophia Drossos, a currency strategist at Morgan Stanley.
Meanwhile, there are some key constituencies for whom the buck's losses are a blessing. U.S. exporters obviously love a sliding dollar because it makes their products cheaper for foreign buyers. And because most commodities are priced in dollars, oil and other raw materials get cheaper for countries with strong currencies.
At the same time, discounted U.S. goods and services become more of an attraction for foreigners looking to vacation here.
For U.S. investors who own foreign stocks and bonds the dollar's drop this year has brought a windfall, just as it did for most of 2002 through 2007. A lower dollar means securities denominated in strong foreign currencies are worth more when translated to dollars.
The Canadian stock market is up 28% in Canadian dollars this year, but it's up 47% in U.S. dollars. The Australian market is up 26% in Aussie dollars -- and 56% in U.S.
But as with all currency moves, there are losers in the buck's stumble. Foreigners' U.S. assets are declining in value (or, in the case of stocks, aren't rising as much). At some point, foreign exporters in Europe, Japan and elsewhere are likely to start screaming about an unfair trade disadvantage. If they're forced to mark up prices of their goods, we'll import inflation. Lastly, Americans who were thinking about foreign vacations may have to reconsider.
The big question is how low the dollar will go. For now, it's still above the worst levels (or best levels, depending on your perspective) of 2008. But it's getting closer to those depths. If it breaks through, there will be a new torrent of speculation about the dollar losing its status as the world's primary currency, and about the risk that that would entail for an economy so dependent on foreign creditors.
Americans have been warned for decades about a possible dollar panic if the world were to lose faith in us. The current decline is no panic. Neither we nor the rest of the world can afford for it to turn into one.
-- Tom Petruno