THE MOST IMPORTANT economic news of recent weeks is the recovery of the long-comatose dollar. On a single day earlier this month it recorded its biggest jump against the euro in eight years, before retreating a bit. Sounds like unambiguous good news, since a stronger dollar might lower import prices, which have risen 21.6 percent in the past year. But economics is never that simple. Here's why.
The good news is that the dollar is showing signs of strength. American consumers, who needed $200 to buy a pair of Italian shoes, can now step into that footwear for around $180. And that £200 British cashmere sweater that set American customers back $400 only a few weeks ago, can be had for only about $370, assuming competition forces hard-hit retailers to pass on the savings they rack up when buying abroad. The lower prices resulting from the dollar's strength make it easier for Federal Reserve Board chairman Ben Bernanke and his monetary policy colleagues to resist pressures to raise interest rates during the current credit crunch and economic slowdown, although Fed watchers are wondering whether that resistance will melt in the face of July's rise in consumer inflation: Prices soared at the fastest rate in almost twenty years.
The bad news is that the dollar is showing signs of strength. Booming exports, fuelled by a weak dollar that makes U.S. goods cheaper overseas, have prevented the economic slowdown from turning into an actual decline. But a $10,000 piece of equipment
that cost a French farmer only €6,250 when the euro was at its peak and the dollar sagging just one month ago, now costs him close to €6,700, and a Brit wandering into New York's fabulous Mac store beneath the General Motors building will find he needs £540 to buy that $1,000 MacBook that he could have had for only £500 pounds a few weeks ago. All economics is about what happens on the margin, and these price increases will tip a few French farmers to make do with older equipment, and some Brits--and Aussies, who also find our stuff about 10 percent more costly--to do without a MacBook.
And investment bankers, who have been flogging U.S. companies to foreigners with their high-flying currencies, are finding life a bit tougher. For example, the rise in the dollar has driven the cost of InBev's bid for Anheuser-Busch from about $52 billion to almost $57 billion, as InBev's euros buy fewer dollars.
The good news for Americans is that the euro and the pound are weakening. That is making it less expensive for us to visit some of our favorite European vacation destinations. And for businessmen to cross the Atlantic to close such deals as are still being consummated. A £300 London hotel room that cost $600 now can be had for closer to $550--not a snip, but somewhat less off-putting.
The bad news for Americans is that the euro and pound are weakening. The weaker currencies make it more expensive for Europeans to buy our goods, exacerbating the effect the shrinkage of the EU economies will have on the demand for U.S. exports. France's trade deficit is at a record and its economy is moribund; Germany's economy, the eurozone's largest, shrank in the last quarter; the housing market in Spain makes America's look robust by comparison; Italy's economy is shrinking; the Irish are wondering where the boom that attracted so many foreigners, now fleeing, went; and Britain is headed for mounting unemployment and stagflation, according to the latest Bank of England report.
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