We all know that it is more expensive to fill our gas tanks – did you know that there is also a direct relationship to the lower dollar? Many commodities are priced in U.S. dollars (e.g., gold and oil), which makes these items cheaper for non-U.S. citizens to obtain and makes them more expensive for us to purchase.
All else equal, US citizens pay more when they purchase imported products or travel abroad (from cheese to BMWs to lodging abroad). China, our top import source, has not been badly impacted as the yuan trades relative to the US dollar. However, the net effect has been fairly muted, with the core U.S. Consumer Price Index (CPI) up only 2.4% in 2007 as foreign companies have elected to decrease margins instead of raise prices and risk losing market share. What receives very little media play is that US exports have become increasingly competitive. For many years the strong dollar has exacerbated our current account deficit, from 1.7% of GDP in 1997 to 6.2% in 2006. Whether it is California wines or Boeing jets, our products have effectively become cheaper to the rest of the world, which outweighs the impact of the negatives above.
The U.S. is also certainly benefitting from increased tourism and direct investment by foreigners. For example, there is an influx of Brits buying up real estate in Manhattan and in Seattle, WA, tourism has almost doubled over the past decade becoming a $6 billion industry and creating 60,000 jobs.
The strong dollar also led to a loss of U.S. manufacturing jobs and increased foreign debt to finance the budget deficit. With the weaker dollar, the motivation to exports jobs declines.
Finally, U.S. investors with foreign investments have also benefited from this change.
Where do we go from here? While it is possible that that dollar will continue to fall over time, it is unlikely to take a precipitous plunge. As the key global reserve currency, a coordinated central bank effort could manage any decline. Over time, the U.S. needs to take steps to reduce our current account deficit without protectionist trade mechanisms. The bottom line is that a weak U.S. dollar is actually a net positive to the U.S. economy – something few Americans and certainly our popular press seem wholly unaware of.