Could the Obama administration be following a weak-dollar strategy deliberately?
Could the Obama administration be following a weak-dollar strategy deliberately? The value of the dollar has plunged against most major currencies' over the past few months, and the administration, while professing to want a strong dollar, has taken no action to support its value.
While administration officials such as Treasury Secretary Timothy Geithner have made ritual comments in favor of a strong dollar, they have been less than ringing endorsements and have clearly failed to convince the foreign- currency markets.
Just since March, the cost of buying one euro has gone from $1.23 to $1.50. The cost of buying one British pound rose from $1.38 to $1.63 last week. A year ago, one dollar would buy 102 Japanese yen. Now it will buy only 92.
The weak dollar is greatly complicating the task of investment advisers and their clients because the value of the currency can have a significant effect on the economy and on the stock and bond markets.
A weak-dollar strategy has some significant positives for the administration.
First, it makes U.S. exports more competitive on world markets, and that should lead to increased demand for those exports, increased revenue for their producers and in-creased employment, helping the economy to recover.
Second, it makes imported products more expensive, and that might lead to U.S.-made goods' being substituted for the imports, again possibly creating or at least protecting U.S. jobs and helping the recovery.
Third, it makes overseas travel more expensive for Americans, while making it less expensive for foreigners to visit this country. Americans may thus spend their travel dollars at home, and foreign visitors may help to stimulate the economy by spending here.
These are fairly obvious reasons to adopt a weak-dollar strategy. A less obvious one is that it supports the administration's clean-energy policies. It does this by pushing up the price of imported oil and hence gasoline. As the value of the dollar falls relative to other currencies, the price of oil rises almost in lockstep.
In the summer of 2008, when oil was near $140 per barrel and gasoline was near $4 per gallon in the United States, the dollar was hitting $1.60 to the euro. At that time, U.S. motorists were eager to buy fuel-efficient vehicles, especially hybrids.
When the financial panic drew investors into U.S. government securities, the dollar went to around $1.25 per euro, oil dropped to about $40 per barrel, and gasoline prices plunged. The demand for fuel- efficient small cars and hybrids fell also, and corn-based ethanol as a fuel additive became uneconomical.
Now, once again, the dollar is falling, and oil prices are rising, just as Congress is about to debate an energy bill designed to address environmental concerns. Higher oil costs are likely to weaken the opposition to alternative-energy sources, most of which currently are more expensive than oil and coal.
A weak-dollar policy has its dangers for the economy, and it complicates investment decisions. If the dollar is allowed to decline too far, foreign investors may refuse to buy U.S. government bonds, forcing interest rates up and possibly applying the brakes to any recovery.
A higher price for imported oil also worsens the trade deficit, putting additional pressure on the dollar. Higher prices for all imports could spark a burst of inflation.
The task for investment advisers and their clients will be to determine which foreign markets — and which companies, domestic and foreign — will benefit most from the weak dollar, and invest in them. They will also have to try to estimate how far the administration will allow the dollar to slide before attempting to halt the slide, or when it will be forced by events to do so.
The task for the administration will be to determine how far to allow the dollar to fall before taking serious steps to shore it up.
