Fall of U.S. dollar may aid economy

By Ken Moritsugu
Knight Ridder News Service

WASHINGTON — The U.S. dollar's recent fall may prove to be a good thing for the U.S. economy, as long as it doesn't spiral out of control.

While a weaker dollar alone won't turn the economy around, it will help stave off deflation and give the ailing economy a small boost. Those benefits would come at a cost, though: somewhat higher prices for American consumers.

The dollar has fallen nearly 25 percent in the past 16 months against a basket of other major currencies such as the euro, the Japanese yen and the Canadian dollar. Market analysts think the decline isn't over. The euro is trading at $1.19, up from 86 cents in February 2002. Analysts project the European currency will hit $1.30 sometime next year.

A weaker dollar helps the economy by boosting U.S. exports, because American-made goods become cheaper in foreign currencies. A lower dollar also nudges up prices at home for many imported products, from French wine to German cars. Higher-priced imports push consumers to buy American, though some U.S. firms may raise their prices to take more profit. The end result: more U.S. jobs but higher prices at the checkout counter.

Also, Americans may forgo overseas vacation plans, spending tourism dollars at home instead. A 200-euro hotel room in Paris now costs $238 a night instead of the $172 it cost early last year.

"The Disneyland workers are happy to see you, but you might have preferred to go to Europe for your vacation," said Michael Swanson, a Minneapolis-based senior economist for Wells Fargo bank.

To the extent that the falling dollar pushes up prices in the United States, it will help prevent deflation, a widespread decline in prices. Deflation can be harmful, because it can squeeze company profits, leading to wage cuts and layoffs.

The benefit of a lower dollar has its limits, though. While imports and exports are important to some industries, such as steel, their impact is much smaller on the U.S. economy overall.

Economists estimate that the decline in the dollar could add 0.2 to 0.5 percentage points to annual economic growth. While that would help, it wouldn't be enough to boost growth from 2 percent today to the 4 percent to 5 percent level needed to bring down the unemployment rate.

Also, the dollar hasn't fallen against the currency that is most important to many U.S. factory workers: the Chinese yuan. China, which has become a major exporter to the United States, keeps its exchange rate fixed at 8.3 yuan to the dollar.

That means the competitive balance between U.S. workers and Chinese workers doesn't change, whatever happens between the dollar and other currencies.