U.S. dollar’s dizzying drop wreaks economic havoc
by KEVIN CARMICHAEL
The U.S. dollar’s long decline has turned into a sudden plunge, throwing currency markets into a frenzy that is complicating life for policy makers and executives the world over.
An index that measures the value of the dollar against six major peers declined for the eighth consecutive day Thursday, the longest slump in two years.
The U.S. dollar is in the midst of what Nomura Securities International analyst Jens Nordvig called a “violent … weakening move,” as a confluence of factors drive investors to seek short-term gains outside the United States.
Gross domestic product in the U.S. slowed to an annual rate of 1.8 per cent in the first quarter, compared with 3.1 per cent over the final three months of 2010, according to the first of three estimates from the Commerce Department, released Thursday.
Fresh evidence that the U.S. economy is struggling to sustain momentum followed Federal Reserve Board chairman Ben Bernanke’s first post-decision news conference Wednesday, when the Fed chief made clear that policy makers are in no hurry to raise U.S. borrowing costs. Interest rate differentials are an important consideration for investors looking for quick returns, and central banks in most other countries are tightening monetary policy to restrain inflationary pressures.
“If the Fed is keeping rates very, very low for a long period of time, it just makes the dollar less and less attractive,” Stephen King, chief economist at HSBC, said in an interview on Bloomberg Television in London.
The dollar’s value matters like no other currency because it is at the centre of global commerce. Most commodities and goods are priced in the U.S. currency, meaning non-American companies and investors have to convert their funds into dollars most every time they venture into international markets.
Daily currency transactions are worth about $4-trillion (U.S.). The U.S. dollar represents 85 per cent of that daily turnover, compared to 39 per cent for the euro, according to the Bank of International Settlements. (Because two currencies are involved in a transaction, the share of an individual currency totals 200 per cent rather than 100 per cent.)
The dollar has been on a downward trend for the better part of a decade, reflecting the rise of emerging-market economies as magnets for international capital that was once vacuumed up by the United States.
For the most part, the dollar’s decline has been orderly, and even welcome, since the International Monetary Fund has contended for years that the U.S. currency is overvalued. That wasn’t the case in the late 1980s.
Earlier this week, Stéfane Marion, chief economist at National Bank Financial in Montreal, sent a note to his clients reminding them what happened in the spring of 1987 when a weaker dollar was suddenly accompanied by a sharp increase in Treasury yields.
“This set the stage for the October 1987 stock market crash,” Mr. Marion said. “This is not the environment that prevails currently, not with a 3.3-per-cent yield on the 10-year Treasury. In our opinion, a weakening [dollar] accompanied by a 10-year bond yield rising quickly to near 5 per cent would qualify as a disorderly depreciation.”
But disorderly means different things to different people.
Reserve Bank of New Zealand Governor Alan Bollard, who is attempting to revive an economy that was rocked by the February earthquake that devastated Christchurch, said after the central bank’s latest policy meeting Thursday that “the elevated level” of the county’s currency is “unwelcome” and “will have some dampening effect on economic activity.”
One of the reasons the New Zealand dollar is strong is because investors are bailing on the U.S. currency in favour of the “kiwi,” which offers exposure to the county’s commodity-based economy at a time of rising resource prices.
The U.S. dollar’s descent is both a blessing and a curse for the big U.S. multinational companies.
PepsiCo Inc., the world’s largest snack food maker, reported a 27 per cent gain in first-quarter sales, led by sales in international markets. When PepsiCo brings that revenue home, it amounts to a windfall profit because of the conversion of stronger euros, pesos and other currencies into weaker dollars. But the sinking dollar also makes planning more difficult, especially when input costs are soaring.
“We’d rather see a steady dollar than anything else,” Hugh Johnston, PepsiCo’s chief financial officer, said in an interview on CNBC.