Would you kindly elaborate on how declining US$ would hurt stocks?
Here's a timely article on the implications of a strong vs. a weaker dollar:
The Dollar Dilemma
By Robert J. Samuelson
There is hardly an economic subject more dreary or baffling to ordinary people than "the dollar." Yet, the "strong dollar" has now triggered fierce debate, with critics urging that the policy -- which dates to the Clinton years -- be abandoned and the Bush administration stoutly defending it. To explore this contentious argument is to discover the vast ignorance that shrouds the economic outlook. No one can honestly say whether a "strong" or "weak" dollar would be better for the economy.
The "strong dollar" refers to the dollar's exchange rate -- its price in relation to other currencies. Since early 1997, the exchange rate has risen more than 25 percent, making U.S. exports more expensive and U.S. imports cheaper. American manufacturers (including General Motors, last week) and farmers complain loudly that the strong dollar punishes their exports, exposes them to excessive import competition and costs jobs and profits. A weaker (that is, lower) dollar could revive the economy, they say. Many economists agree, but it's hard to know whether they're correct.
If only trade were affected, a cheaper dollar would help. Indeed, it would also aid some countries (most notably, Argentina) whose currencies are tied to the dollar. Unfortunately, other damaging side effects might overwhelm trade gains. The stock market is one danger. Foreigners own about 11 percent of American stocks. A cheapening dollar might persuade them to leave the market, because their investments would be losing value in their own currencies. If foreign selling caused -- or worsened -- a broad market decline, the fallout could be devastating. Confidence would suffer, and dispirited consumers might cut spending.
The strong dollar of the Clinton years resulted less from deliberate policies intended to steer the dollar than from conditions (the American economic boom, low U.S. inflation, Asia's financial crisis, meager economic growth in Europe and Japan) that made foreigners crave dollar investments. More fundamentally, the dollar's strength reflects its role as the world's international money -- a role dating to World War II. Traditionally, money is three things: A "means of exchange" -- of buying and selling; a pricing mechanism; and a "store of value" -- a way of preserving income. In world commerce, the dollar performs these jobs far more than other major currencies, the yen or euro.
What this means is that, as trade has risen, so has global dollar demand, because dollars are the preferred means of exchange. Global commodities (oil, computer chips) are generally priced in dollars. Oil costs $25 a barrel, not 29 euros. Similarly, the demand for dollars as a "store of value" has increased. In some countries, people don't trust local currencies -- which often suffer huge inflations -- and hold dollars as a refuge. (They get dollars by buying them from foreign exchange dealers or on black markets.) In 2000, foreigners held $252 billion in U.S. currency (paper money), estimates the Federal Reserve. That roughly equals the paper money held by Americans. By other estimates, dollar holdings averaged about $700 per person in Argentina, $400 in Russia and $300 in Singapore.
Even larger dollar investments occur when foreigners buy U.S. stocks, bonds or companies. In 2000, foreigners purchased $193 billion of American stocks and $293 billion of corporate and U.S. government agency bonds (not including Treasury bonds). Again, the appetite for U.S. securities bolsters global demand for dollars. Companies, investors and individuals convert other currencies into dollars; the dollar's exchange rate rises. (Of course, Americans also invest abroad; but these flows have recently been exceeded by foreign investments here.)
After World War II, other countries needed dollars to buy American food and machinery. The United States supplied dollars through foreign aid and the investment of U.S. multinational companies. The inflationary 1960s and 1970s flooded the world with dollars. The dollar depreciated. Its central role, though jeopardized, revived once inflation receded. The United States still had the world's richest economy, the most stable democracy and the most open financial markets. The result is that the global demand for dollars drives its exchange rate to a level that prevents a U.S. trade surplus. The "current account" -- a broad measure that includes trade, tourism and some other items -- has recorded deficits since 1982 with one exception (1991, a recession year).
For Americans, the strong dollar confers huge benefits and burdens. Cheap imports favor consumers, low inflation and low interest rates. They also compel U.S. companies to stay competitive. In the 1990s, import competition and the resulting low inflation prolonged the economic boom. But the strong dollar also puts American factories and workers -- from Boeing on down -- at a permanent trade disadvantage. A sluggish economy elevates the pain.
Conceivably, the dollar might now fall spontaneously. Supply is growing, while demand may abate. In 2001 the current account deficit is a record $450 billion, about 4.5 percent of national income. A slowing economy may dampen foreign appetite for dollar investments. But whether the Bush administration should pursue a weaker dollar by having Treasury Secretary Paul O'Neill "talk down" the currency is a harder issue.
A lower dollar could have good and bad effects. It might encourage the European Central Bank to reduce interest rates, because the cheapening of dollar-based commodities (mainly oil) would lessen inflation. Good. But any U.S. trade gains might inflict trade losses on other countries that would deepen the global slump. Bad. Even worse, a rapid drop of the dollar might -- as noted -- depress the stock market. In truth, no one knows the "right" level for the dollar and how to get there gracefully.
And there's a nastier truth: The strong dollar symbolized a global economy that, in the 1990s, got wildly out of balance. The United States raced ahead; Europe and Japan limped along; developing countries became too dependent on foreign capital. If a weaker dollar simply signals that stagnation has become almost universal, there will be few winners and many losers. |
