NEW YORK (CNN/Money) -
If it's Monday, the dollar must be hitting another record low against the euro.
That's bad news if you're an American tourist planning a trip to Paris to eat some Freedom -- er, French -- bread, but many economists believe that it's also mostly good news for the U.S. economy.
In early trading Monday, the European currency surged above $1.25, trumping the record of $1.2470 set on Dec. 24, which broke the previous record of Dec. 22, etc., etc.
All in all, the euro has risen nearly 20 percent against the dollar this year, meaning a greenback won't buy as much Belgian chocolate in Brussels, but otherwise providing a boost to the U.S. economy and corporate profits, since it makes American-made goods cheaper for European buyers.
"If the dollar continues to weaken at a controlled pace, it's a net positive for the U.S. economy," said Anthony Chan, chief economist at Banc One Investment Advisors.
Greater foreign demand for U.S. goods would spur more domestic production, creating much-needed manufacturing jobs and giving a boost to the world's largest economy.
In addition, Chan estimated, the dollar's slide could help S&P 500 earnings growth -- which he sees at about 15 percent in 2004.
"That's not as great as 2003 earnings growth, but still positive," Chan said. Wall Street analysts, on average, think earnings grew about 22 percent in 2003, according to earnings tracker First Call.
The fear among some investors and economists is that, with the U.S. trade deficit swollen to enormous heights, the dollar's decline could turn into a rout, pushing foreign investors out of U.S. assets, which would hurt U.S. markets and the economy.
The U.S. current account deficit, the broadest measure of the trade gap, could hit a record 5 percent of gross domestic product (GDP) this year, according to Wachovia Securities economist Jay Bryson. GDP is the broadest measure of the nation's economy.
With such a huge deficit, some economists worry, the United States is essentially borrowing billions of dollars from overseas investors to support its way of life.
If those investors decide to end that relationship, things could get ugly in a self-feeding cycle, with falling stock and bond prices fueling more and more selling of U.S. stocks and bonds, further depressing the dollar. The result would be higher interest rates and a slowdown in economic activity.
"Consider an individual who lenders deem is no longer creditworthy," Bryson wrote in a recent research note. "When lending ceases, that individual must bring her spending in line with her income, and her lifestyle suffers."
But Bryson and most other economists doubt foreign investors will pull the plug any time soon. Though the dollar has tumbled against the euro, Asian central banks have stepped in to prop the dollar up against Asian currencies -- and they'll probably keep doing that, since weakness in their currencies keeps their goods competitive in the United States and elsewhere.
Though some analysts say the euro may yet rise further, they still doubt it will cause much trouble in the U.S. economy.
In the 1980s, for example, an index measuring the currencies now retired for the euro rose as high as $1.60, according to Brown Brothers Harriman senior economist Lara Rhame, without damaging U.S. markets or the economy.
"The euro can go pretty far -- when currencies correct, they have a tendency to do that," Rhame said. "But I don't see the recent move as dramatic or unexpected, and I don't think it's out of line with fundamentals."
Nevertheless, the dollar's drop has been bad news for foreign holders of U.S. stocks -- the $17.82 you'd get from selling a share of CNN/Money parent company Time Warner (TWX: Research, Estimates) won't buy as much as it once did.
What's more, interest rates on U.S. Treasury and corporate bonds could rise as the dollar falls -- in part, to keep up with the inflationary effects of the dollar's falling value -- raising the cost of borrowing and potentially offsetting the dollar's positive effects on U.S. exporters, according to Citigroup senior economist Steven Wieting.
"At worst it's a wash-out," Wieting said. "I don't think the fears or the benefits of the dollar's fall are really quite as much as they're cracked up to be."
|
