The dollar dropped on Main Street, too

The dollar dropped on Main Street, too
Wall Street isn't the only place affected by the greenback's downward spiral
By Lisa Twaronite, MarketWatch
Last Update: 6:03 PM ET Oct 5, 2007Print E-mail Subscribe to RSS Disable Live
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SAN FRANCISCO (MarketWatch) -- You don't have to quaff French wine in your
dining room or go skiing in the Austrian Alps. At home or abroad, all Americans
are feeling the same breeze from the dollar's recent sharp drop -- and some
might even catch a chill from it.
The Federal Reserve's decision last month to cut interest rates by a
larger-than-expected half-percent point sent the already-weakening greenback to
an all-time record low against a basket of six major currencies. In the third
quarter, the euro appreciated more than 5% against the dollar, most of the gains
coming in September alone.
'Even though the typical person isn't immediately affected, the U.S. economy is
less well off.'
? Howard Chernick, economist
Weakness in the dollar means prices of imported goods, particularly oil, will go
up, raising the risk of inflation. American consumers will be paying more soon,
with the looming threat of paying even more later on.
"The inflation risk from higher import prices will be the dominant initial
effect," said Howard Chernick, an economics professor at Hunter College in New
York. "The most immediate effect is imports denominated in dollars -- mainly
oil. We already saw a spike in oil prices. So a bit down the line, that's 10 to
15 cents more per gallon of gas at the pump."
A weaker dollar can help narrow the U.S. trade deficit by making America's
exports more affordable abroad.
The dollar vs. This week One year ago
The euro $1.41 $1.27
British pound $2.04 $1.88
Japanese yen 117 yen 117 yen
Canada 0.98 cad 1.13 cad


Yet it could also make funding those imbalances more difficult. The U.S. has to
attract billions of dollars a day from foreign investors, and a weakening
currency makes dollar-based assets less attractive because of the consequences
it can have on their long-term value.
On the other hand, the pressure on the dollar is increasing the international
buyout appeal of American companies and real estate -- and Main Street itself
might end up on the auction block.
The weaker dollar will also affect Americans in the long term in ways they might
not have even considered, if companies here have trouble affording capital
goods.
Chernick cites as an example Europe's leadership in producing wind power
technology. It's a cutting-edge niche market that is suddenly even more
expensive for the U.S. energy industry as the euro gains more muscle.
"The cost of increased reliance on renewable energy just went up -- so more
pressure to build more coal power plants," he says. The dynamic can have
far-reaching consequences.
"Even though the typical person isn't immediately affected, the U.S. economy is
less well off," said Chernick.
Moreover, he said, "there is a psychological effect that is hard to measure. The
U.S. economy is being devalued by the world, so our sense of exceptionalism will
diminish."
Some cheer dollar's drop
To be sure, some Americans stand to benefit from the weaker dollar and could end
up with more money in their pockets, even if inflation eventually erodes the
buying power of that cash.
Some of the beneficiaries own or work for businesses whose products are exported
abroad. Their goods stand to get cheaper, making them more competitive, in
overseas markets.
Earlier this week, Pepsi Bottling Group Inc. (PBG:pepsi bottling group inc com
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4:01pm 10/05/2007

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PBG 39.10, -0.21, -0.5%) said that its third-quarter profit grew by more than
25%, noting that the lower dollar contributed about two percentage points of
growth in net revenue growth. Athletic-shoe maker Nike Inc. (NKE:NIKE, Inc
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4:01pm 10/05/2007

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NKE 60.35, +0.99, +1.7%) also cited the weaker currency as a factor helping its
international sales.
U.S.-based tourism-related industries are also cheering the dollar's drop.
Everyone's cousins in the Old Country can finally afford that long-awaited U.S.
family reunion, combined with some bargain shopping. And Americans themselves
are more likely to take domestic trips rather than head overseas, where their
vacation dollars won't go as far.
Moreover, while the weakening dollar and inflation threat will deter some
foreign investors, once the greenback stabilizes, bargain hunters will flock to
U.S. assets like shoppers to a fire sale. Community

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36 Comments (view all)


It does not seem that who is in office has much short term effect on the Dollar
or economy. However if certain people get commanding majorities in 2008, it
seems a worrisomely good bet that burning Dollars will be cheaper tha...

- d1grubb

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NIKE, Inc (NKE)
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Commerce Bancorp, Inc (CBH)

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by d1grubb
1 day ago
This is too ignorant. "Weakness in the dollar means prices of imported goods,
particularly oil, will go up...The most immediate effect is imports denominated
in dollars -- mainly oil. "

If goods are denominated in a foreign currency and the value of the dollar falls
vs say Euros, then yes those goods immediately cost more. If they are dollar
denominated as with oil, then the price stays the same.

The template for Marketwatch is to report everything as bad, even if this
exposes the ignorance of a mindlessly obedient reporter.

Why must readers wade through this trash? Yes, I read the whole article and it
contains no news.

Report comment

by kipsmiller
1 day ago
d1grubb,

so you support a weak dollar policy? do you not realize that the price of oil is
determined by a global market, and that the currency that it is denominated in
is irrelevant to its true cost? as the dollar falls, the cost of oil for
Americans rises. it does not stay the same. it seems clear to me that our
current weak dollar policy is selling out our long term prosperity for short
term politcal gain. i don't dispute that there are those who benefit from a weak
dollar, but for the well-being and prosperity of most Americans, I strongly
believe that we need to return to a strong dollar policy.

and don't be so quick to chastise and berate. slow down and think through this a
bit more. there's much more nuance to this issue than you think.

Report comment

by gotgoldenticket
1 day ago
Grubb, I suggest you look for a very very basic course in economices before you
start/continue investing, and look for something called INFLATION, maybe you
heard that word allot these days? and especially before you bash the reporter of
this article.

Report comment

by Zillionaire
1 day ago
What is actually happening is a paradox. Cheaper foreign and domestic goods
purchased by the American Consumer, and cheaper American dollars tempting
foreigners to purchase goods in America or sold from America. I challenge
anyone to find any products besides tobacco and gasoline which a foreigner can
purchase cheaper in their own country.

They can't because of tariffs and V.A.T.s

Report comment

by FDRAllOverAgain
1 day ago
As banks worldwide withdraw credit and lose loads of money, all paper currencies
will appreciate in absolute buying power. Any short term inflation in prices is
due to heavy speculation on the wrong side of future prices - which is lower due
to dissappearing Dollars/Euros/Yen and loss of credit.

Report comment

by daveellie
1 day ago
Has d1grubb considered what the debasing of our currency does to the holders of
our government debt (and boy do we have a lot of it) . Would he want to hold a
10 year treasury bond and get paid back in ten years with a devalued currency.
Buyers of our treasury notes will demand higher interest rates or quit buying at
all to offset this debasement. Either way interest rates will go up and could go
up dramatically. I won't even discuss the topic of possible "loss of faith" in
our currency globally do to devaluation which would have drastic consequences
for our country such as being a safe haven during turmoil along with the pricing
of world commodities (oil) in other currencies.

Report comment

by FDRAllOverAgain
1 day ago
In order for inflation to occur, there has to be buying in volume with more and
more cash or more and more credit.

Today there is little to no cash, which leaves credit. Credit can evaporate in
an instant, as we've tasted. If credit gets rolled back, and it looks like that
is where we are headed, there will be a rapid depression the likes of which
civilization has yet to imagine. It could make 1930 will look like Christmas at
the Rockefellers'.

Report comment

by JDoe
1 day ago
High current account deficit and low savings rate means that defacto devaluation
of the $ was probably inevitable, which is not necessarily bad for the economy
(though it is not good for anyone that hold US$ assets).

There is evidently a risk of inflationary pressure from imported goods, however
this is somewhat exagerrated as imports as a proportion of the total economy is
quite low (contrary to popular belief).

There's much talk about the possibility of the foreigners loosing confidence in
the US and reduce financing, this probably pales besides the possibility of US
investors loosing confidence and head for the exit, ie foreign assets, of which
there begins to be a trickle of evidence lately.

Nobody heard reccomendations to move into foreign assets lately? Let's just hope
it doesn't turn out to be a lemming year next year.

PS. I moved out of US assets years back, if next year ends up lemming year I'll
be looking to move back in.

Report comment

by d1grubb
1 day ago
History correlates well with a devalued currency and a poor economy. That is why
the Yen and the Mark were worthless after WWII, but have since rebounded. The
short term fluctuations in the Dollar correlate much better with interest rates
and confidence than trade deficits, probably for reasons like the above of JDoe.

However this is hardly news. The comments are more informative than the
Marketwatch article which is babble.

Also, if you are buying something from abroad and the Dollar is falling in
value, contrary to the article, you would always prefer that your purchase (i.e.
oil) was denominated in Dollars (basic economics). Hopefully, OPEC will not
change to a currency basket as proposed in the past unless the Dollar truly
spirals down.

Report comment

by d1grubb
1 day ago
The current version of the Marketwatch article has, since yesterday, edited out
the nonsense about Dollar denominated oil prices referred to in the above posts.

Report comment

by 2xb
1 day ago
Once again, d1grubb has no clue about economics and inflation. People will
demand more dollars per barrel as the dollar loses value. It doesn't matter what
currency the transaction is made with. a devalued currency will result in a
higher cost of living along with higher interest rates for everyone and
everything in America.

As for deflation, don't be so sure. There's about 6 trillion US dollars being
held by foreign governments. If they decide to lower their exposure, the world
will be awash in US dollars. The falling demand for commodities will be met with
a falling demand for US dollars. On top of that, OPEC will likely begin
accepting other currencies as payment if the dollar continues to lose value.
What are we going to do, bomb every OPEC country?

Report comment

by JDoe
1 day ago
Anyone notice that price oil and gold (both nominally US$ "denominated") has
increased? Or might it be that the "value" of the US$ has decreased?

Contrary to beliefs expoused by some on this forum, the fact that many
commodities, such as the above, is priced in US$ does in no way "protect"
against a devaluation in the dollar. (Ie, if the dollar is worth less, expect to
have to spend more per barrel or ounce). Much, though not all, of the recent
price increases in the commodities markets can be traced back to dollar
weakness. However, devaluations do not (immediately) lead to people feeling
poorer (unless it leads to inflation) hence it has often been used by
governments in dire straits as a "free" alternative to put things straight.

PS. FYI Oil producers, gold miners and other commodity producers have no problem
settling trades in any currency (with a few expections such as the Zimbabwean
$m, the North Korean Won, and the likes.)

No need to worry about going down the path of the Weimar republic yet
http://en.wikipedia.org/wiki/Image:Inflation-1923.jpg

Report comment

by d1grubb
1 day ago
Of course a strong currency is good, but the value of the Dollar short term is
determined more by confidence in America and its economy, which is why those
trillions of Dollars abroad do not return. The Dollar holders abroad have
confidence in the currency.

As for the price of oil, it is just a commodity. Unfortunately, it is to some
extent a fixed market and surely you can find a more predictable and probably
lower price if it remains nominally Dollar denominated. Also, it would not be
good for Dollar confidence if this were otherwise.

Report comment

by primeplus
1 day ago
It is reassuring to see comments like d1grubb's as I take comfort in knowing
that the fool is alive and well. And a fool and his money will soon be parted.

Report comment

by sven
1 day ago
A currency should reflect the underlying fundamentals of the economy. With an
$800 billion trade deficit, $9 trillion national debt and over 50 trillion $ in
future obligations the only direction for the dollar is down. Ross Perot warned
about this in the early 90's and guys like Soros and Buffet warned in the early
2000's. We sold our industrial base and now that we are in the process of
globalization we have not much to offer the rest of the world except toxic
investments. We have become a country in denial of reality and now have the need
to pump massive amounts of liquidity(inflation) into the system to avoid a
collapse. The biggest myth ever purported is that a weak currency is bad for the
US. What's bad is the abusive spending and debt levels and the selling out of
our industrial base. That is what is devalueing the dollar.

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by JDoe
1 day ago
Weakness (or strength for that matter) is only a reflection of the recent trend
of exchange rate. Except for national pride it is not in itself relevant.

National pride is also what causes resistance to selling out to foreigners that
the previous poster laments and the Dubai Ports controversy demonstrated (No
national security issues, just pride issues).

Unless you hold shares (own) the companies being sold you really shouldn't even
have much of a stake in the issue, and if you do own them and look to sell you
probably want as many buyers as possible to ensure you get the best possible
price (no matter the nationality of the buyers).

Maybe you want the foreign debt buyers to go away too? That may eventually be
the results from increasing US isolationist politics. (Whatch this space for the
ensuing mayhem if this ever happens!)

Nationality of ownership (debt or equity) is luckily less of an issue in the US
than in other places of the world, and that has overall been a blessing for the
US economy. Let's hope it stays that way!

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by sven
1 day ago
Foreign debt buyers are leaving on their own free will. Slowly they are waking
to see the underlying fundamentals of the US economy.

Report comment

by d1grubb
1 day ago
Why can this not go on forever? The US has ran a significant trade and budget
deficit since the 1960's. The accumulation of Dollars abroad is not new.
Supposedly the Japanese were buying America in the 1980's. Now they lend their
Yen to buy higher yielding Dollars. If foreign confidence in the Dollar
continues at the level of the last half century then I wonder is the trade
deficit basically a "free ride" that can go on and on? I do not see why it
should stop any time soon. This Dollar doomsday scenario is older than many of
those who write about it.

Report comment

by JDoe
1 day ago
Hmm. Let's see: Why can't you live on your credit card forever?

Report comment

by d1grubb
1 day ago
That is not a new problem tho. If my income goes up and I can afford the
progressively higher payments then I can borrow more and more on my card
forever. What is different now from forty years ago? A rival major currency in
the Euro? A trade deficit as a bigger share of GDP? An undervalued Chinese Yuan?
A demographic wave overwelming the federal budget as too many people retire? If
something is that substantively different from 1980, maybe, but what is it?

Report comment

by JDoe
1 day ago
True, unless you happen to be spending more on the card than what you earn!

Luckily the US Govt happens to own the printing presses and so could print more
money to pay back their debt so they could actually spend quite a lot more than
what they earn indefenitely. Zimbabwe is currently testing out this theory,
maybe the US shouold follow their example?

PS The're also testing the suggestion of keeping (read kicking) out foreign
(read white) owners of businesses may be better for the country. May the red man
inherit the US!

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by d1grubb
1 day ago
So dollar inflation could render a big pile of foreign held dollars into a
smaller pile and perhaps trust in the Fed is part of why we have continued to
run a big current accounts deficit for decades without everyone cashing in their
dollars.

If we are in trouble, the increasing desire for a welfare state with retirees
approaching 65, the undereducated approaching 45 when they can no longer do
backbreaking labor, might be a good first choice as the cause. If most
Americans are needy and nonproductive, then dollar denominated assets are not
very productive and the dollar is not worth much.

Report comment

by sven
1 day ago
Noones cashing in their dollars until they start getting hit hard with
inflation. China is doing everything they can except strengthen their currency
to combat increasing inflation. By hoarding dollars foreigners are building up
their economies with their cheap labor but also hoarding future inflation. They
are attracting the big orders from buyers in the US since their prices are so
cheap. When they let their currency float free it will strengthen substantially
and the peoples purchasing power will increase reflecting their true "real
productive" growth rate. If our trade deficit doesn't reverse, the dollar will
keep sinking into the abyss as we will need ever more credit or welfare to keep
up the consumption which is propping up the economy. Eventually, the dollar will
be so cheap foreigners will find value in the things we produce and our exports
will grow as our imports slow.

Report comment

by JDoe
23 hours ago
Inflation does not differentiate between "foreign" and "domestic" dollar piles.
Both heaps will shrink at the same rate.

The devaluation however do hit foreign piles harder.

Ie if your base currency be the Euro (the currency in which you think about
money, normally in which you have most of your expenses) and you hold US$ assets
(such as treasuries or US equity) when you translate the value of your assets
back to your base currency your pile would be a lot smaller.

Good news is that the slide will make the US more competitive (and foreign ones
less) that will eliminate the current account deficit hence stabilising the
exchange rate.

Ofcourse if the orderly slide turns into something worse things could turn nasty
very rapidly.

Report comment

by tim101
23 hours ago
consider this example of extremes to clarify the situation........... suppose
the usa prints TEN TRILLION DOLLARS and it ends up in china sitting there for 5
years minumum. this is a deferred tsnami of inflation to hit domwestic
usa.all that PAPER will want to be traded for something tangible eventualy. THAT
IS AN EXAMPLE OF MONETARY INFLATION TURNING INTO PRICE INFLATION AND THAT IS
10% OR MORE FOR THE LAST FEW YEARS OIL WILLL BE 100PLUS SOON AND GOLD 1000 THATS
MY BET ALSO 30 YEAR 8.5% IN ONE YEAR

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by interested
19 hours ago
Why we do not do our own producing of our products here on American soil and
realize that we are making China rich and taking many jobs from our own people.
We used to manufactor our own Cars, toys and clothes. We need to keep our
dollars home. Let our dollars work for us.

Report comment

by YusufS
18 hours ago
A lot of intelligent comments in this post however there is one topic that I
haven't seen any posts on...Peak Oil. Peak Oil, the basic tenet of which is that
the world is running out of cheap, easily recoverable oil was once a fringe
lunatic theory ( as was global warming ). No ones laughing anymore. The list of
major fields predicted to enter depletion soon or in depletion now include
Canterell ( Mexico), Burgan( Kuwait), Ghawar( Saudi Arabia), and The North Sea(
UK). In fact the only country that may have any substantial unexploited oil
reserves left is...Iraq.Here are some of the predicted time frames,Petroleum
experts Colin Cambell:- 2001- 20010, Mathew Simmons 2005-2008, USGS:- 2037,
IEA:- 2013-2037, Oil and Gas Journal:- 2003-2020, Deutsche Bank:-2014.

I am looking at an increasing number of media covering this topic and if any of
it is halfway correct, then we have a really really big problem on our hands; a
lot bigger than inflation, deflation and deficits.Check out this 2005 article in
the UK's Guardian
http://www.guardian.co.uk/life/feature/story/0,13026,1464050,00.html

Report comment

by d1grubb
18 hours ago
Peak oil refers to oil that can be economically produced and peak production has
or will soon be reached even as demand increases. However there are many other
sources of mobile hydrocarbons that have been barely touched i.e. tar sands,
ultra heavy oil, shale, natural gas to liquids, coal gasification and of
course fermentation projects like ethanol. Most of these are quite doable in
North America and would thus help the dollar and trade deficit. There are plenty
of sources of oil equivalents when oil prices push $100 per barrel.

Unfortunately, most and especially the most promising, will probably never be
developed for "environmental" (meaning political) reasons, starting with global
warming, which seems to me to have become a political and taxation issue rather
than a scientific one.

At any rate, this is unfortunate since energy self sufficiency would certainly
help the Dollar and economy.

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by YusufS
17 hours ago
Oil is already at $84 and pushing $90. $100 bucks is pretty much a given at
this point especially if, err.. when, the dollar tanks. The problem with tar
sands is that it take 5-10 times the energy to extract, shale oil even more. The
point is that we're seeing a higher cost of extracting... in terms of a currency
that's lowering in value. Talk about burning your candle at both ends! The fact
that we continue to be in Iraq bleeding dollars and lives points to a
probability that these alternatives are not economically feasible in the near
term.

Report comment

by 2xb
8 hours ago
The oil sands are already very profitable. Look at how much suncor and imperial
oil are making. They were already profitable when oil was in the $50's. The
total cost of producing from the oil sands is probably $40

Report comment

by Bob1188
8 hours ago
For the average guy, as opposed to the investor, one big problem is that America
is developing a competitive disadvantage when it comes to oil and oil prices.
Because oil prices tend to be denominated in dollars, countries using currencies
that are not declining with the dollar are not experiencing the same magnitude
of increase in crude oil prices. One can thus view the current situation as
less of an increases in oil prices paired with a decrease in the dollar and more
as a decline in the value of the dollar vis-a-vis other currencies, including
the euro, the pound, and the barrel of crude oil (though not the yen). One
could also view the dollar as declining vis-a-vis the U.S. stock market, which
would suggest that U.S. stocks are not really increasing as much as they are
maintaining their value with respect to euro-, pound-, and crude oil-based
currencies. To this casual observer of last August's markets, it was odd that
the euro and pound fell rather than rose against the dollar when the U.S. stock
market was falling as a result of the non-fiixed-rate mortgage situation. One
possibility is that the holders of those currencies were short dollars and found
themselves having to buy a lot of dollars to cover positions affected by the
non-fixed-rate mortgage situation. This suggests that dollar holders may be
managing dollars on a carry-trade basis (converting dollars into currencies
offering higher interest, instead of holding dollars) much like the way the
Japanese yen is managed. Because all of this smells a lot like inflation, I
imagine that the Federal Reserve is finding itself in a very difficult
situation. And an because the ultimate source of these problems is likely to be
Federal budget deficits related to military spending, one could say that we are
finding ourselves between Iraq and a hard place.

Report comment

by YusufS
7 hours ago
Once upon a time The Greenback was backed by gold and silver. When that was
finally done away with ( I believe that it was Nixon cancelling Bretton Woods
in 1971 ), the Dollar became a "Fiat" currency, one that was backed by the
strength of the U.S. economy. At least that was the official story. In fact, the
dollar's backing was simply changed from gold to black gold. The powers decided
that the price of oil would be denominated in dollars and only in dollars.
That's how the dollar became the global reserve currency, and heretofore was one
of the legs upon which this superpower rests. With successive administrations
printing paper to finance the deficit, debasing the currency and every central
bank running to dump the dollar ( the polite term is "diversifying into a basket
of currencies" ) our status as a superpower, at least an economic one, will soon
have a "?" in front of it.

Report comment

by d1grubb
6 hours ago
Supposedly competition is good, but this is not a sporting event and the US now
has more competition for the Dollar as "the global currency" and for resources,
monetary or otherwise. I presume this is a drain on the Dollar when the Euro is
seen as a major global currency backed by a superpower that is no longer the
old stagnated socialist EU with excessive regulation, taxation and very limited
growth. Since the EU has expanded, they have effectively imported a larger,
labor force with less baggage and growth is comparable to the US, at least for
2007. China presents similar competition with a larger economy than Germany.

Globalization has undoubtedly raised our standard of living, but we may be at a
point where it helps the Euro and Yuan more than the Dollar. With growth,
usually comes higher interest rates and a rising currency, which has lifted the
Euro from a low around $0.86 to now about $1.42 in only a few years.

Report comment

by business
6 hours ago
To Sven ---- Amen !!! You hit it right on the head in my opinion. I
figure roughly $1.5 TRILLION leaving the US every year to never return. Look at
the size of the national debt now. I don't care how big the bucket is, it must
eventually run dry !! Now think about this .... since we have given away our
manufacturing base, what can the US do to reverse the bleeding of money from the
US ?? The only thing I can think of is to export food and some technology. Does
anyone think that would ever be enough ?? So what else is coming down the pike
to boast the US economy ?? If you go back and look at how the US became a rich
country, it was because wealth was coming to the US --- now wealth is leaving
the US. I think someone a lot smarter than me could probably figure just about
when the US will go bust. Does anyone believe the buying power of the dollar
is going to increase as the economy it is based on continues to degrade ?? And
of course, taxes will continue to grow exponentially.

Oil ?? I hope it goes to $1000 a barrell -- ( figuratively speaking ) ! Maybe
then we will get serious about developing nuclear, solar, wind, geothermal, bio,
etc. energy sources. Just think of what will happen to the Arabs when no one
needs their oil --- or at least a lot less. From what I read solar is getting
close to being competitive on a per kilowatt - hour basis. I personally think a
nuclear basis for industry and a solar basis for individuals is not that
difficult to achieve. So rather than burn money in Iraq, Europe, Japan, Korea,
etc for their defense, why not take care of the home front for a change ??

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by JDoe
5 hours ago
EU continues with excessive (ever inreasing) regulation & taxation. The limited
EU growth only looks good, when compared with the slowing US economy. Socialism
continues alive and well in Europe (although not communism), in the US
Socialists use a diferent brand name starting with D.

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by d1grubb
4 hours ago
It does not seem that who is in office has much short term effect on the Dollar
or economy. However if certain people get commanding majorities in 2008, it
seems a worrisomely good bet that burning Dollars will be cheaper than burning
heating oil in a few years. The more you tax something, the less you get and the
more it costs.

Of course, if the population is taxed into grinding poverty, oil imports will be
unnecessary.

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