Thursday, November 29, 2007

The Changing Dollar Differential Does Not Mean a Bad Economy

Earlier this month I posted about the US Dollar’s relative weakness against other currencies. Thomas E. Nugent says in this NRO article that the dollar has not actually weakened. Rather, other currencies are gaining strength due to the rise of capitalism in many parts of the world. Nugent shows how the relative value of the dollar to these other currencies is not harming the US economy.

Well, isn’t it at least bad that other currencies are gaining on the dollar? It is if you travel abroad or if you buy goods from nations with stronger relative currencies. But for the most part, this leveling of the global currency market is a good thing, Nugent argues. While there have been times that a weak dollar has accompanied major economic problems, Nugent says the in the current environment “certain benefits flow to, not from, the United States.”

“For example, the “dollar differential” is benefiting exports and suppressing imports. More people are working because of rising export demands. And countries with booming economies — where standards of living are on the rise as a result of imports that both cost less and help contain inflation — welcome those imports.”

In other words, the strengthening of other currencies against our dollar is not wreaking havoc. Rather, it is beneficial in many ways. Nugent writes, “Investors shouldn’t mistake a booming global economy for a weak dollar.”


Frank Staheli said...

I guess what I'm worried about is if China and Japan decide suddenly to invest in Euros and get rid of their dollars.

Scott Hinrichs said...

That's not necessarily a bad thing. It allows other nations to diversify their holdings instead of relying so heavily on the USD. It simply means that other nations are performing well. It actually means that there is less internation strain on the USD and that the so-called trade deficit can be reduced.

Even if other nations sell off some of their dollar-based instruments, there will still be a significant market for the purchase of those instruments. However, they are likely to be sold off in smaller to chunks to a variety of nations. This will actually diversify our nation's creditors, making us less beholden to major interests.

The dollar's condition is not nearly as bleak as many make it out to be.