David Kirkpatrick

June 12, 2008

Strong dollar, weak dollar — a primer

Filed under: Business, Politics — Tags: , , , , — David Kirkpatrick @ 1:43 pm

There’s a lot of talk in the news these days about our “weak” dollar. If you haven’t taken Econ 101 (and maybe even if you have) the concept of a strong dollar, or a weak dollar may be not be all that clear.

AccountantsWorld.com has posted a nice little Q&A covering the basics of the issue. There are positives and negatives to both states for the US dollar, and either extreme is not good. The primary consequence of our current weak US dollar that most everyone is feeling and talking about is its direct relationship to the cost of gas at the pump.

From the link:

Q: What is the relationship between a weak dollar and oil and gasoline prices?

A: It is a direct one, since oil generally is bought and sold in dollars. The more the value of the greenback goes down, the more it costs to buy a barrel of oil.

Of course, there are other factors involved in today’s roughly $4-a-gallon (€0.64-a-liter) gasoline prices. They include soaring demand from China and India, political turmoil in some oil-producing regions, the inability or refusal of major oil-exporting countries to increase production, and market speculation.

The weaker dollar has been a major factor, and one that could threaten the chances of a U.S. economic recovery.

Q: How long has this been going on?

A: The dollar has been on an extended slide against other major currencies, especially the euro and the Japanese yen, for about five years, during which the U.S. trade deficit with the rest of the world generally continued to widen. That required more borrowing from abroad and further weakening the dollar. At the same time, the economies of Europe expanded, driving up the value of the euro against the dollar. And recent sharp interest cuts by the Fed to deal with the U.S. housing and credit crises also have served to push down the dollar’s value. The dollar has fallen sharply against the euro in the past year.

Q: What is the U.S. government’s position on the dollar?

A: U.S. officials, usually the treasury secretary, have long repeated the mantra that a strong dollar is in the nation’s best interest. Yet the administration did nothing to back up its assertion with action, and many policy-makers clearly welcomed the slide, mainly because it helped to keep U.S. exports expanding, a rare bright spot in a troubled economy.

During the last week, however, officials have signaled that they do not want further declines. Bush, Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke have issued statements backing the need for a strong dollar and expressing misgivings about the economy.

“A strong dollar is in our nation’s interests. It is in the interests of the global economy,” Bush said Monday as he embarked on a European tour.