The falling dollar: Bad news, or good news?

When the dollar rises, imports become more affordable to us, and the trade deficit tends to increase.  When the dollar falls, exports tend to rise; that helps create jobs here, and boosts GDP.  So, is a falling dollar bad news, or good news?

Here's the latest version of the trade-weighted dollar chart; the dollar is almost back down to its 1987 1997 level.  (Exports, by the way, are behaving as predicted: rising briskly.) 

[Source: St. Louis Fed]

In the long run, a falling dollar is usually a precursor to higher inflation.  So, in spite of the apparent short-run benefits, it would be better if the dollar leveled off, removing a measure of uncertainty.  Financial maneuvers to avoid inflation or deflation distract resources from the task of real growth.      

Comments

[JJ]

Don't you mean 'almost back down to it's 19 *9* 7 level,' not '19 *8* 7 level'?

[Patrick]

i was gonna say the same thing. i dont think we want to be comparing anything to Oct 1987.

[Steve]

Thanks for catching that mistake; should be 1997, not 1987. I corrected it.

[Kurt Brouwer]

There is mounting pressure to 'do something' about the dollar. However, the primary source of weakness in the dollar is falling Fed Fund rates. The dollar was strong in 2000-01 until the Fed began dropping rates to deal the 9-11 and the recession.

The dollar-Euro exchange rate stabilized with the Fed began raising rates in 2004 and then the dollar plummeted again recently as the Fed dropped rates.

So far, the falling dollar has not led to higher inflation. It may yet do so, but I have not seen evidence of that yet.

Also, the trade deficit is improving and many commentators have also viewed that as potentially inflationary. We seem to be benefiting from the weaker dollar right now and, absent a precipitous plunge, I don't think the Treasury should attempt any heroic measures.

[Mike H]

Aren't the booming economies of Europe and elsewhere at least as responsible for the falling dollar as the fed? The fed has to stabilize our economy before it stabilizes the dollar. As soon as it's done dropping rates and it makes that known there shouldn't be anymore trouble for the dollar in that respect.

[ilsm]

The falling dollars is the inflation tax.

FF rate down, money flowing, prices rising.

Maybe that causes enough bracket creep to reduce the deficit too.

All in all good especially if you grow your own food and don't use imported oil.

[Thomas]

Falling against what?

The falling dollar is a devalued dollar and hurts all Americans.

Everybody benefits from a sound US dollar. (The exception might be those who worship big numbers.)

How do we get a sound dollar?

[Grodge]

My paycheck is denominated in US Dollars, so I've gotten a pay cut over these past few years. Great.

What are the signs that the fall of the dollar is decelerating? I see none.

Sure exports are increasing but we are being paid for those goods and services in devalued currency, so the "increase" is specious barely making up for the devaluation.

Even the terrific 16% rise in my retirement portfolio over the last 12 months is blunted back to zero when we factor in the poor dollar performance.

[Aaron]

If you are paid in dollars and buy things in dollars, you have not lost any "value" except when you buy imported goods, and only those from countries where their currencies are appreciating. Housing and food are mostly domestic, so it should be a small effect.

Meanwhile, in China, exporters have to keep raising their prices, which is good news for producers in other countries who have had to deal with the "China price" for many brutal years. This may lead to a shake-out in China where there has plausibly and over-investment in factories.

At the same time, imports from the USA and other countries to China increase. I am enjoying some imported German beers here in China, which are a welcome change from the domestic product.

I understand free trade and cheap imports are good for the consumer, but I think we should let the market set the rate for the US dollar rather than try to prop it up, which usually doesn't work anyway.