Dollar's slide has far-reaching effects

By Rachel Beck
Associated Press

NEW YORK — The recent bounce in the stock market and the weakening of oil prices may be grabbing attention from another story that could put U.S. financial markets and the economy in jeopardy: the steep fall of the dollar.

The dollar has been struggling for nearly two years, but in recent weeks its slump has been exaggerated, dropping against most major currencies and falling to a record low against the euro.

Should it stay on such a course, the implication extends a lot further than just raising the cost of a European vacation. Although the weak dollar helps U.S. exporters and companies doing business abroad, it could mean higher borrowing costs and make everything from imported cars to toys more expensive.

The dollar hit a new low against the common European currency at about $1.30 to one euro. The greenback has also lost 10 percent of its value against the currencies of the United States' major trading partners since mid-May.

There are many reasons for the decline. Most recently, pressures are coming from investors' worry that the Bush administration would do little to stem the dollar's slide. U.S. Treasury Secretary John Snow on Monday said the United States would like the dollar to strengthen, but he repeated his position that international currency markets should be left to set its value.

With this weakness in the dollar, there is concern over how foreign investors will react — particularly Asian central banks, which in recent years purchased dollars to hold down the value of their currencies and then used those dollars to buy U.S. Treasurys.

There are indications that foreigners are starting to pull back their investments, which is worrisome given that they own about 48 percent of Treasurys and 24 percent of U.S. corporate debt, according to The Bond Market Association.

In August, the most recent data available, net foreign purchases of government bonds fell 34 percent to an 10-month low of $14.7 billion.

Meanwhile, foreigners sold $2 billion in stocks, down sharply from the $9.8 billion gain the month before, according to the Treasury Department.

The problem with all this is that the United States needs that foreign money to cover shortfalls in the U.S. trade and budget deficits. And it is hard to drum up that missing cash inflow from other sources.