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How much purchasing power has the dollar lost? Take a look

March 23, 2011 |  6:30 am

When the Federal Reserve began telegraphing late last summer that it would launch a new round of monetary stimulus to help the U.S. economy, Wall Street assumed that the dollar would be the sacrificial lamb.

More money in the financial system, after all, would be expected to depress the greenback’s value against other currencies. But that could work to the economy’s advantage by making American exports cheaper for foreign buyers.

The downside is that a weaker dollar means a loss of purchasing power for Americans traveling abroad or buying foreign goods.

How much of a loss? Measured since Aug. 31, the latest downtrend in the dollar has lopped off more than 10% of the buck’s purchasing power against a number of currencies.

Example: One dollar now buys about 0.704 euros, down 10.8% from the 0.789 euros it bought on Aug. 31. (The flip side is to say that one euro now costs about $1.42, up from $1.27 seven months ago.)

Also since Aug. 31 the dollar has fallen 13.8% against the Swedish krona (there goes that summer holiday in Stockholm!), 11.6% against the Australian dollar, 11% against the Swiss franc and 8% against the Canadian dollar.

Dxy322 The DXY index (charted at left), which tracks the dollar against six major currencies including the euro, the yen and the British pound, fell on Monday to a 15-month low.

The buck’s latest decline has been broad-based, weakening it against many emerging-market currencies as well. The dollar now buys 9.2% fewer Mexican pesos than on Aug. 31, 8.4% fewer Russian rubles, 7.8% fewer Taiwanese dollars and 6.5% fewer South Korean won.

There’s more behind the dollar’s slide than the Fed’s stimulus program of $600 billion in Treasury bond purchases, of course. Record federal budget deficits, which the Fed indirectly is helping to finance, don't help the dollar's image.

The Fed also has committed to keeping its benchmark short-term interest rate at record lows, even as many emerging-market countries have been lifting rates to battle inflation pressures. Rising interest rates tend to strengthen a currency by attracting global capital.

In recent days, expectations that the European Central Bank and the Bank of England will soon raise their short-term rates have helped boost the euro and the pound against the buck.

For now, there’s one big exception to the weak-dollar rule: the yen. When the Japanese currency surged to record highs against the dollar last week, Japan and its allies in the Group of 7 industrialized nations decided enough was enough. They launched a concerted intervention in currency markets to beat down the yen -- the first such joint action since 2000, when the G-7 intervened to bolster the sinking euro.

The plan, aimed at helping Japan’s exporters as the country reels from the devastating March 11 earthquake and tsunami, has worked so far: The yen was at 80.97 per dollar on Tuesday, weakening from the record 76.36 per dollar reached on March 16.

But just to get back to where it was a year ago the dollar would have to appreciate to 90 yen.

-- Tom Petruno

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