According to some analysts, the dollar is set for a fourth consecutive and unprecedented year of decline. To some, this is good news; to others, a disaster.

Some Historical Perspective

In March 1973, the Federal Reserve’s Nominal Major Currencies Dollar Index was set at 100. In March 1985, the U.S. dollar reached its highest level at 143.90, while its lowest point came about 10 years later, in April 1995 when it fell to 80.33. In December 2004, the index continued to fall, slipping to 80.19, as compared to major currencies.

Why has the dollar lost so much value since its recent peak in February 2002? In early 2002, the U.S. current account deficit, the budget deficit, less foreign investment in the U.S., a volatile American stock market and a decline in U.S. consumer confidence contributed to the dollar’s subsequent decline. And recent uneasiness has much to do with little evidence that the U.S. government is getting its budget or trade deficits under control.

Impact of a Falling Dollar

When the dollar decreases in value, U.S. exports become more attractive abroad. In turn, companies selling more goods and services often hire more workers. But a decreasing dollar has other consequences.

For example, U.S. manufacturers who rely on imported components and materials will find it more costly to produce their goods. In turn, these producers may absorb this added cost, which will reduce corporate profits and possibly impact hiring, or they may pass this increase on to consumers, which could lead to inflation.

Additionally, a dollar that is declining in value for lengthy periods of time or at a rapid pace can dampen investor confidence and result in less U.S. inbound investment. In turn, this can make it difficult to finance the budget deficit and may lead to higher interest rates. Thus, business expansion becomes more costly and compromises the ability of companies to hire new employees.

Impact of a Rising Dollar

A rising dollar, which often leads to increased foreign investment in the U.S., makes U.S. exports of goods and services more expensive abroad and can result in lost export deals. Additionally, according to Fred Bergsten of the Institute for International Economics, every 1 percent rise in the U.S. dollar’s trade-weighted value boosts the U.S. current account deficit by at least $10 billion.

If perceived as unsustainable, a rising current account deficit can negatively affect confidence in the U.S. economy and, in turn, accelerate downward pressure on the dollar.

The Goal: A Stable Dollar

Overall, a rising or declining dollar has a number of positive and negative consequences. But one thing is certain: a stable and predictable dollar is extremely important to the well being of the United States.

About The Author John Manzella [Full Bio]

John Manzella, founder of the Manzella Report, is a world-recognized speaker, author of several books, and an international columnist on global business, trade policy, labor, and the latest economic trends. His valuable insight, analysis and strategic direction have been vital to many of the world's largest corporations, associations and universities preparing for the business, economic and political challenges ahead.




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