Nick Smith, June 15, 2003

A weak dollar sounds worse than it is. The dollar is strong when the dollar purchases more foreign currency than it had previously. But as there are many other currencies, it is quite possible for the dollar to be getting stronger against some currencies and weaker against others. For example, looking at the Canadian dollar, the Japanese yen, and the European euro over the last 2 ½ years, it is clear that the dollar has weakened against two of these currencies and strengthened against the other. At the beginning of 2001, the U.S. dollar bought 1.05 euros, 1.49 Canadian dollars, and 114.75 Japanese yen. On June 11 of this year, the U.S. dollar bought .849 euros, down 19%, 1.35 Canadian dollars, down about 10.4%, and 117.68 Japanese yen, up about 2.5%.

The dollar becomes strong when the demand for dollars increases relative to the supply of dollars. There are several ways for this to happen. If Japan wished to make its exports cheaper, its central bank could buy U.S. dollars, strengthening the dollar against the yen. Or if the Federal Reserve increases the U.S. money supply, there will be more dollars relative to other currencies, and the value of the dollar will decline. Also, the lowering of interest rates by the Fed tends to push down the value of the dollar.

The next question is whether a strong dollar is good or bad for the U.S. economy. The reality is that a strong dollar is good for some Americans, and bad for others. Suppose that you’re an autoworker in Michigan. Your company sells cars in the U.S. and exports to Europe and Japan. Japanese companies and European companies also sell cars in the U.S., Japan, and Europe. If the U.S. dollar weakens against the yen and the Euro, then U.S. cars will be less expensive for Japanese and European consumers and Japanese and European cars will be more expensive for U.S. customers. This will result in more profits and higher employment in the U.S. auto industry.

On the other hand, if you buy foreign-made products, the weaker dollar means that you have to pay more. Or suppose, that you work for a company that uses German and Japanese steel to produce washing machines. A weaker dollar will make foreign steel more costly, thus making your company’s product more expensive. This will result in fewer sales and decreased employment.

In the last two years we have seen an increase in the U.S. money supply, a lowering of U.S. interest rates, and a U.S. economy that is outperforming the European, Canadian, and Japanese economies. However, inflation is a risk with an increasing money supply and foreign investors have less interest leaving their money in U.S. stocks. All of these things are consistent with a weaker dollar.

Economists have long been divided over how much the money supply should be increased which would influence the strength of the U.S. dollar. In practice, the dollar is likely to gain strength against some currencies, and lose strength against others. The effect on the U.S. economy will depend on which countries we’re importing from, which countries we’re exporting to, and myriad other factors including the strength of foreign economies relative to ours. The current weaker U.S. dollar means that consumers will tend to pay a little more, but it will be good for producers and therefore better for job growth than otherwise.

Congressman Nick Smith represents the 7th District Congressional of Michigan in the U.S. House of Representatives.