> The Christian Science Monitor Jul 6, 9:29 AM EDT
> The buck doesn't stop here; it just keeps falling
> By TOM RAUM Associated Press Writer
>
> WASHINGTON (AP) -- Things in the U.S. sure are tough. Brother,
> can you spare a euro? Signs saying "We accept euros" are
> cropping up in the windows of some Manhattan retailers. A
> Belgium company is trying to gobble up St. Louis-based
> Anheuser-Busch, the nation's largest brewer and iconic Super
> Bowl advertiser.
>
> The almighty dollar is mighty no more. It has been declining
> steadily for six years against other major currencies,
> undercutting its role as the leading international banking
> currency. The long slide is fanning inflation at home and
> playing a major role in the run-up of oil and gasoline prices
> everywhere.
>
> Vacationing Europeans are finding bargains in the U.S., while
> Americans in Paris and other world capitals are being
> clobbered by sky-high tabs for hotels, travel and even
> sidewalk cafes. Northern border-city Americans who once
> flocked into Canada for shopping deals are staying home; it's
> the Canadians flocking here now.
>
> Everything made in America - from goods to entire companies -
> is near dirt cheap to many foreigners. Meanwhile, American
> consumers, both those who travel and those who stay at home,
> are seeing big price increases in energy, food and imported
> goods. The dollar has lost roughly a quarter of its purchasing
> power against the currencies of major U.S. trading partners
> from its peak in 2002.
>
> Since oil is bought and sold in dollars worldwide, the
> devalued dollar has made the recent surge in energy prices
> even worse for Americans, leading to $4 gasoline in the United
> States. Analysts suggest that of the $140 a barrel that oil
> fetches globally, some $25 may be due to the devalued dollar.
>
> Further declines in the dollar will add to oil's appeal as a
> commodity to be traded.
>
> Oil, suggests influential energy consultant Daniel Yergin, is
> "the new gold."
>
> The limp greenback has had one big benefit to the U.S.
> economy: Since it makes American goods cheaper overseas, it
> has helped manufacturers who export and other U.S. based
> companies with international reach. Exports have been one of
> the few bright spots in an otherwise darkening U.S. economy.
>
> Franklin Vargo, vice president of international economic
> affairs at the National Association of Manufacturers, welcomes
> the dollar slide, as do members of his organization.
>
> "We can see that, when the dollar's not overpriced, that
> people around the world want American goods and our exports
> are going gangbusters now," he said.
>
> He doesn't see the dollar as undervalued. He sees it as having
> being overpriced in the 1990s - and what's happened since as
> something along the lines of a correction.
>
> Still, Vargo acknowledges the dollar's decline has brought a
> measure of pain to some consumers. "As the dollar has gone
> down in value, that has added to the dollar cost of oil. No
> question. So having the dollar decline is not unambiguously a
> plus. That's why we say there's got to be a balance there
> somewhere. What we want is a Goldilocks dollar. Not too
> strong, not too weak. But just right. And only the market can
> determine that," Vargo said.
>
> Mark Zandi, chief economist at Moody's Economy.com, said
> expanding exports due to a weak dollar are "an important
> source of growth, but it doesn't add a lot to jobs, it doesn't
> mean very much for the average American household. For the
> average American, for the average consumer, these are pretty
> tough times."
>
> The loss of the dollar's purchasing power and international
> respect has some experts worrying that the euro might one day
> replace the dollar as the so-called primary reserve currency.
> And that could trigger a dollar rout as foreign governments
> and international investors flee from U.S. Treasury bonds and
> other dollar-denominated investments.
>
> Making matters worse: The gaping U.S. current-account deficit
> - the amount by which the value of goods, services and
> investments bought in the U.S. from overseas exceeds the
> amount the U.S. sells abroad - and the low levels of domestic
> savings means that foreigners must purchase more than $3
> billion every business day to fund the imbalance.
>
> Since roughly half of the nation's nearly $10 trillion
> national debt is held by foreigners, mostly in Treasury bills
> and bonds, such a withdrawal could have enormous consequences.
>
> Yet Washington finds its options limited.
>
> President Bush asserts longtime support for a "strong" dollar,
> and made that point again Sunday in a news conference in Japan
> with Prime Minister Yasuo Fukuda. "In terms of the dollar, the
> United States strongly believes - believes in a strong dollar
> policy and believes that the strength of our economy will be
> reflected in the dollar."
>
> But not once in his presidency has the U.S bought dollars on
> foreign exchange markets - called intervention - to help prop
> up the greenback. There's no telling where the buck will stop
> these days, although for the past few weeks it seems to be in
> a holding pattern. Even as three Bush Treasury secretaries in
> a row spouted the strong-dollar mantra, the dollar kept
> tumbling against the euro, the pound, the yen, the Canadian
> dollar and most other major currencies.
>
> The Federal Reserve could prop up the dollar by increasing
> interest rates under its control. Increased yields would make
> dollar-denominated investments more attractive to foreigners.
> But that could undercut the already anemic economic growth in
> a frail U.S. economy rocked by soaring fuel costs, falling
> home prices and rising unemployment - and the lowest reading
> of consumer confidence in 16 years.
>
> The Fed must do a balancing act between keeping the domestic
> economy from going into recession and keeping inflation at
> bay.
>
> Furthermore, no Fed likes to raise rates aggressively in a
> presidential election year. It seems more inclined to hold
> interest rates low for now to give financial markets time to
> recover from the housing meltdown and credit crunch. It did
> just that in its meeting on June 25, leaving a key short-term
> rate at 2 percent. The rate reached that level in April after
> a series of aggressive cuts that brought it down 3.25
> percentage points since September. Those cuts helped ease the
> housing and credit crises - but drove the dollar further down.
>
> In early June, Bush declared before his trip to Europe: "A
> strong dollar is in our nation's interests. It is in the
> interests of the global economy." That, plus a warning by Fed
> Chairman Ben Bernanke that the dollar's weakness was
> contributing to U.S. inflation, seemed to temporarily break
> the dollar's tumble. Presidents and Fed chairmen don't usually
> talk directly about the dollar and exchange rates - leaving
> that up to the Treasury secretary - and international bankers
> and investors took note of the high-level attention.
>
> Over the past few weeks, the dollar has remained relatively
> stable, although it took a dip after the Fed decided to leave
> rates unchanged. The long slide may not be over.
>
> Still, if the Fed moves to lift rates later this year, as some
> traders and investors anticipate, it could buttress the dollar
> and spur an exodus of speculators from the oil market -
> helping to both prop up the dollar and drive down oil prices.
> But few economists are sanguine that the economy will improve
> any time soon.
>
> The other main tool to move the dollar - intervention in
> currency markets by buying dollars and selling other
> currencies - is risky.
>
> It would take great sums of money to make any difference. The
> foreign exchange market is the largest in the world, with over
> $1 trillion traded each day. Seeing the U.S. trying to prop up
> the greenback by buying dollars could be taken as a sign of
> desperation and possibly trigger a renewed round of selling.
>
> Furthermore, there has been little encouragement for such a
> strategy from finance ministers from the Group of Eight
> wealthy democracies - Japan, Britain, Germany, France, Italy,
> Canada and Russia plus the U.S.
>
> Leaders of the eight countries were to meet in Japan beginning
> Monday, but the falling dollar was not even on the formal
> agenda. It's too touchy an issue, and the dollar's relative
> stability over the past few weeks makes it easier for world
> leaders to steer clear. "People will be talking about it in
> the corridors," said Reginald Dale, a senior fellow with the
> Center for Strategic and International Studies.
>
> Treasury Secretary Henry Paulson has suggested that nothing is
> "off the table" including intervention. But Bush has made
> statements suggesting he intends to let market forces set
> exchange rates.
>
> The dollar has fallen so far, it will be difficult to halt or
> reverse its slide.
>
> U.S. efforts to persuade Saudi Arabia and other major oil-
> producing nations to increase their production - and help ease
> pressure on both oil prices and the dollar - have brought
> scant results.
>
> "There's no magic wand," said White House press secretary Dana
> Perino. "It's not going to be a problem that we solve
> overnight."
>
> The impact of the falling dollar is not always visible to the
> average consumer. Not like the big numbers on gas pumps that
> give stark evidence of price levels.
>
> But imported goods, from fuel to cars from Japanese automakers
> and toys from China - are getting more expensive just as U.S.
> wages are either stagnant or falling.
>
> American companies suddenly look cheap to acquisition-minded
> foreigners, particularly those based in Europe.
>
> Belgian-based InBev's hostile bid for Anheuser-Busch is a
> recent example. It has bid $46 billion to acquire the company
> - a 30 percent premium above where Anheuser's shares traded
> before the June 11 proposal.
>
> A successful acquisition by InBev would put the last remaining
> mass-market American brewer in foreign hands. InBev is based
> in Belgium but run by Brazilians. Anheuser-Busch, which brews
> both Budweiser and Bud light, holds a 48.5 percent share of
> U.S. beer sales. Anheuser-Busch rejected InBev's bid, but the
> Belgian brewer forged ahead, seeking to unseat Anheuser's 13-
> member board and take its offer directly to shareholders.
>
> If the takeover goes through, it might open the floodgates to
> other foreign takeovers of American companies.
>
> Some of the dollar's decline depends on hard-to-measure
> factors, like the psychology of foreign investors.
>
> When the U.S. economy is weakening, many investors stay away.
> The slide of the dollar has coincided with a long period of
> relatively low interest rates.
>
> And some of the decline in the dollar's global role "is due to
> the foreign policy failures of the Bush administration, not
> just to recent economic developments and policies," suggests
> Adam S. Posen, deputy director of the Peterson Institute for
> International Economics and a former economist at the Federal
> Reserve Bank of New York. In other words, some international
> investors unhappy with Bush's policy on Iraq or toward other
> parts of the world might not wish to invest in American
> companies or buy U.S. bonds.
>
> Still, he argues that the euro is unlikely to replace the
> dollar as the world's main reserve currency, and that the euro
> may be at "a temporary peak of influence."
>
> David Wyss, chief economist at Standard & Poor's in New York,
> says he envisions a day when the dollar and the euro will
> share billing as the world's reserve currencies.
>
> He predicts that the dollar will remain roughly at its present
> levels "for a couple years." Still, he says, "We might not be
> done with this down leg."
>
> Another big problem for the dollar is that the European
> Central Bank is likely to hike rates while the Federal Reserve
> stands pat, giving euro-based investments a bigger yield
> advantage.
>
> "I could see more downward pressure on the dollar, over the
> course of the summer, not dramatically, if the ECB does raise
> rates," said Robert Dye, an economist with PNC Financial
> Services Group. "If it is one and done, pressure will be
> minimal. But if it's an ongoing pattern of rate increases,
> there will be more substantial pressure."
>
> A euro now buys as much as $1.55 in the United States.
>
> The dollar has been the leading international currency for as
> long as most people can remember. But its dominant role can no
> longer be taken for granted.
>
> Paul Volcker, who headed the Federal Reserve from 1979-87,
> warned in April that the nation was in a dollar crisis, and
> that what is happening now reminds him of the early 1970s,
> when serious inflation erupted as economic growth stagnated.
>
> Then, as now, a weak economy limited the Fed's options. The
> result was a spiral of rising prices and wages - until the
> Fed, led by Volcker, suppressed double-digit inflation with
> huge interest rate increases that pushed the economy into a
> steep recession in 1982. He recently criticized the current
> Fed as defending the economy and the market, instead of
> defending the dollar. Volcker said that will make defending
> the greenback much harder later.
>
> Energy consultant Yergin, chairman of Cambridge Energy
> Research Associates, recently told the House-Senate Joint
> Economic Committee that oil had become "the new gold."
>
> "Oil has become a storehouse of value - reflecting broad
> global economic trends and imbalances. At the same time, oil
> is increasingly seen as an asset by financial investors, an
> uncorrelated alternative to equities, bonds, and real
> estate," he said.
>
> When the credit crisis broke last summer, the result was a
> sharp reduction in interest rates by the Fed. That, in turn,
> accelerated the fall of the dollar.
>
> "Instead of the traditional `flight to the dollar' during a
> time of instability, there has been a `flight to commodities'
> in search of stability during a time of currency instability
> and a falling dollar," Yergin said.
>
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