Does the Strong
Dollar Matter?
Part 3
by Jim Surowiecki
(Surowiecki)
Why the Dollar Matters
What's interesting about all this is that thirty years ago corporations and
investors didn't really have to worry about these questions. It wasn't until
the end of the Bretton Woods economic order, which came in 1971 when President
Richard Nixon took the dollar off the gold standard, that private currency
traders began to exercise real influence over national exchange rates. Because
the value of the yen or the mark was no longer pegged directly to the value
of the dollar, currency traders could drive the price of money up or down,
depending on where profits could best be made. In the process, they suddenly
were able to help determine how much you would pay for a Japanese import,
or how many American jobs would be lost in the auto industry because of a
strong dollar.
This revolution in international finance, which former Citibank CEO Walter
Wriston has described as creating a permanent "referendum" on government
policies, has made it far more difficult for nations to remain independent
from prevailing ideological trends -- any government that bucks the established
order risks having its currency crushed by skeptical traders. At the same
time, it's made the relationship between the value of a country's currency
and its economic well-being more complicated than it once was.
A nation wants its currency to be sound, of course. The disastrous impact
of Mexico's devaluation of the peso shows what happens when a country realizes
its currency's value does not reflect its economic reality. But having a
genuinely strong dollar is not necessarily identical to having a genuinely
strong production economy. Even as a strong dollar makes imported goods cheaper,
keeping inflation down by increasing competition with domestic goods, it
makes it more difficult for domestic producers to compete abroad. In the
worst-case scenarios, it actually prices U.S. companies out of global markets.
These questions are far from academic in an increasingly global economy.
Although foreign trade still accounts for less than twenty percent of the
U.S. economy, the largest corporations in America -- and those that have
come to set the tone for the stock market as a whole -- do a considerable
percentage of their business abroad. While companies like Microsoft and Intel,
which have little or no foreign competition and a record of consistent
price-cutting, reap benefits from the strong dollar in the form of increased
sales, others find that business is being taken elsewhere. Most notably,
the Big Three automakers have started to clamor a bit more noisily for a
weaker dollar, since Japanese car companies have kept their prices for the
new model year stable, while the American companies have raised prices.
On the other hand, it's also clear that the weak dollar helped prop up U.S.
automakers throughout the 1970s. It allowed them to cover up for inefficiency
and poor corporate planning by exempting them from real competition with
foreign companies. Once the dollar strengthened, the real weaknesses of U.S.
companies were exposed, and the process of reinventing themselves could begin.
Part 4, Is The Dollar a One-Time Charge? |