Posted on: Thursday, September 25, 2003
Dollar cannot risk a sudden free fall
By Ken Moritsugu
Knight Ridder News Service
WASHINGTON — A slide in the value of the U.S. dollar has spooked stock and bond markets this week, a reminder that a dollar crash could devastate the American and global economies.
A rise or fall in the value of the dollar against other currencies matters little by itself for most consumers, unless they travel overseas.
In Hawai'i, a weaker dollar and stronger yen would mean that the yen goes farther in buying hotel rooms, airfares or admission to attractions, a positive development for businesses catering to Japanese tourists. The main downside for Hawai'i and the rest of the nation is that a stronger yen eventually could make goods imported from Japan more expensive.
Yet a sudden change in the exchange rate can also influence job creation, investment and mortgage-interest rates and shrink the value of retirement portfolios.
In recent years, foreigners buying dollars — and investing in the United States — have been an important prop for the economy. Should they suddenly get cold feet, propelling the dollar down, they probably would pummel the stock market, drive up interest rates and push up the price of imports, stoking inflation. Such a shock would drag down other economies as well, because so many countries depend on the huge U.S. market to sell their goods.
While many economists agree that the dollar is too strong, they're hoping for a gradual fall instead of a sudden plunge.
But herein lies the danger: The herd mentality of markets can turn a gradual decline into an all-out run. If investors believe that the dollar is headed down, they'll sell their dollar holdings. Those sales will depress the dollar, sparking a new round of dollar selling in what can quickly become a downward spiral.
That fear drove down stock and bond markets Monday and well into Tuesday. Stocks fell further yesterday amid fears of another threat to the global economy: rising oil prices.
Economists say the dollar, despite falling 33 percent against the euro and 17 percent against the yen since early 2002, remains overvalued. The American currency needs to fall much further to emerge from the danger zone, they say.
"The road ahead will be long and arduous, and not without risk, especially in oft-volatile currency markets," Stephen Roach, the chief economist at Morgan Stanley investment bank in New York, wrote in a commentary this week.
Behind the dollar's vulnerability is the huge U.S. current account deficit, which consists of the trade deficit along with some financial transactions.
America in essence has been living beyond its means, importing more than it exports and relying on money from abroad to get by. That money can come from foreign investments in American stocks or foreign purchases of U.S. bonds.
The current account deficit is headed toward a record $550 billion this year, the equivalent of $1.5 billion a day.
As this deficit grows, foreign investors could lose faith in America's ability to repay its debts. Any sign of weakness could lead them to dump their holdings, causing a dollar collapse.
"You're piling up more and more dry kindling, and at some point there could be a spark," said Jay Bryson, global economist at Wachovia Corp., a Charlotte, N.C.-based bank.
There's reason for hope, however. The dollar, which started rising in 1995 and peaked in early 2002, has declined gradually since then. A dollar buys about 111 yen today — down from 135 yen in February of last year. The euro has risen from 86 cents to about $1.15 over the same period.
Advertiser staff contributed the information on Hawai'i.
