How Low Can it Go?

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The U.S. dollar is sinking, and America's critics are gloating about it. Iran's Mahmoud Ahmadinejad claims that George Washington's face graces a ''worthless piece of paper.'' Venezuelan President Hugo Chavez thinks it's curtains for America as a world power. ''By the crash of the dollar,'' he says, ''America's empire will crash.''

The truth is that a somewhat weaker dollar probably is good for America at the moment. It's one reason that the nation probably will avoid a recession over the next few months.

The dollar is down 10 percent since January against an assortment of other currencies, and it's off 13 percent against the euro. Viewed from abroad, that weaker dollar looks like a big "Sale!" sign hung on everything American, and foreigners are buying with glee. Exports are up a remarkable 12 percent this year as of the end of September, on track to top $1.6 trillion. That keeps our factories and offices humming and employers hiring.



Strong exports are one reason that unemployment is hovering at 4.7 percent, even though home builders have practically hung up their hammers and financial firms have been laying off workers by the tens of thousands. Strong exports also are helping counterbalance the weight of falling housing prices and the subprime mortgage debacle.

Although American job hunters - in the right fields - should love the weak dollar, American shoppers may feel its sting. The flip side of a weak dollar is higher prices. Gasoline prices average a painful $2.87 in St. Louis, up 70 cents over the past year, according to AAA. Strong demand in the world oil market is the main reason for that price, although the weak dollar also plays a role.

But so far, the steep drop in the dollar hasn't resulted in a steep rise in prices for other imported goods. The price of imports was up 3.2 percent for the first three quarters of 2006. That's more than the 2.2 percent rise in the core consumer price index, excluding food and energy, but it's not enough to concern the anti-inflation hawks at the Federal Reserve.

Ken Matheny, economist at Macroeconomic Advisers, thinks globalization is holding down import prices, even as the dollar sinks. If a European company raises the price of a handbag, American shoppers will find a cheaper one made in the Philippines.

The dollar's fall actually is long overdue. America has been running massive trade deficits - exporting dollars in exchange for imported goods. The dollar had retained its value because foreigners preferred to invest their earnings in the United States, buying American debt and other assets. China and other Asian nations also link their currencies to the dollar, which helped prop up the dollar's value.

Now American interest rates are dropping, the nation's economy is slowing and the credit markets still are in a tizzy over the subprime mess. All those factors make the dollar less attractive to foreign investors.

Although the weak dollar helps America for now, things could get out of hand. Currency markets are prone to panic, and if the dollar's value were to plunge precipitously, overseas investors might dump their American assets, pushing up interest rates and driving down stock prices.

That's unlikely, however. Chavez's financial savvy falls considerably short of his rhetorical flair. At this point, America's economic stature isn't threatened by the weak dollar.

Reprinted from the St. Louis Post-Dispatch.
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