— “The Financial World According to Inya” Column,
by Inya Ivkovic, MAIt seems there is a rare consensus around the globe among economists, major market participants and politicians: the declining U.S. dollar is perceived as a good thing, both as a symptom of the disease and as its cure.
In the years before the Great Recession, the world was far too reliant on the U.S. consumer. Such reliance created an environment of indulgence among Americans, where money was easy, where credit was cheap, and where saving was overrated. In turn, the U.S. consumer created a treacherous platform upon which the global economy grew, fuelled by excessive debt-based spending and aided and abetted by advantageous exchange rates. When that platform collapsed few months ago, along with the U.S. consumer, who retreated into its shell like a turtle, the developed world started looking towards Asia and how the consumer demand could be revived and cultivated in that corner of the world. However, this global consumer spending rebalancing process will have both as a consequence and as a driving factor the weakening U.S. dollar.
The U.S. dollar is currently declining against most major currencies, including the euro, the yen and the Canadian dollar. In fact, earlier this week, an index that measures the greenback against six major currencies hit its lowest mark in more than a year. Obviously, investors are searching for short-term profit in currencies, as the global economy gains traction. They are hunting for returns and selling their dollars to buy futures contacts on almost anything, from commodities to Euro debt to Brazilian reals. At this point, any investment seems better than a country saddled with enormous budget deficit, a near-zero key interest rate and the slowest GDP growth rate among developed economies. What an odd contrast to last fall and early into this year, when the global economy stood at the brink of an abyss and when investors around the globe perceived the U.S. and its currency as a safe haven, because the greenback had the backing of a government that has never in its history defaulted on its debt.
Of course, such a path is not pain-free for economies other than the U.S. As the greenback weakens and other currencies gain momentum, if not fundamental strength, these countries’ goods and services have become more expensive on the world stage, which is already adversely impacted by low demand. But, at the recent G20 Summit in Pittsburgh, policies promoting this new balance have been adopted, intended to restructure the global economy so that it is less susceptible to financial disasters, even if it means at a significantly slower growth rate.
How else is the plummeting greenback good news? As the U.S. dollar weakens, imports become more expensive, thus putting a damper on the Americans’ habit of financing their purchases through debt. At the same time, domestic goods and services become less expensive in international markets, providing a much-needed leg up to the country’s bruised and beaten manufacturing sector, among many others. And, as domestic products become more competitive, more Americans will get off the government dole and back into factories and offices across the country. In other words, the sooner the world’s largest economy recovers, the sooner the global economy recovers.