U.S. dollar's dizzying drop wreaks economic havoc By KEVIN CARMICHAEL
| Thursday, Apr. 28, 2011 7:55PM EDT
The U.S. dollar’s long decline has turned into a
sudden plunge, throwing currency markets into a frenzy that
is complicating life for policy makers and executives the
An index that measures the value of the dollar against
six major peers declined for the eighth consecutive day
Thursday, the longest slump in two years.
U.S. dollar is in the midst of what Nomura Securities International
analyst Jens Nordvig called a “violent … weakening
move,” as a confluence of factors drive investors
to seek short-term gains outside the United States.
Gross domestic product in the U.S. slowed to an annual
rate of 1.8 per cent in the first quarter, compared with
3.1 per cent over the final three months of 2010, according
to the first of three estimates from the Commerce Department,
Fresh evidence that the U.S. economy is struggling to sustain
momentum followed Federal Reserve Board chairman Ben Bernanke’s
first post-decision news conference Wednesday, when the
Fed chief made clear that policy makers are in no hurry
to raise U.S. borrowing costs. Interest rate differentials
are an important consideration for investors looking for
quick returns, and central banks in most other countries
are tightening monetary policy to restrain inflationary
the Fed is keeping rates very, very low for a long period
of time, it just makes the dollar less and less attractive,”
Stephen King, chief economist at HSBC, said in an interview
on Bloomberg Television in London.
The dollar’s value matters like no other currency
because it is at the centre of global commerce. Most commodities
and goods are priced in the U.S. currency, meaning non-American
companies and investors have to convert their funds into
dollars most every time they venture into international
Daily currency transactions are worth about $4-trillion
(U.S.). The U.S. dollar represents 85 per cent of that daily
turnover, compared to 39 per cent for the euro, according
to the Bank of International Settlements. (Because two currencies
are involved in a transaction, the share of an individual
currency totals 200 per cent rather than 100 per cent.)
The dollar has been on a downward trend for the better
part of a decade, reflecting the rise of emerging-market
economies as magnets for international capital that was
once vacuumed up by the United States.
For the most part, the dollar’s decline has been
orderly, and even welcome, since the International Monetary
Fund has contended for years that the U.S. currency is overvalued.
That wasn’t the case in the late 1980s.
Earlier this week, Stéfane Marion, chief economist
at National Bank Financial in Montreal, sent a note to his
clients reminding them what happened in the spring of 1987
when a weaker dollar was suddenly accompanied by a sharp
increase in Treasury yields.
“This set the stage for the October 1987 stock market
crash,” Mr. Marion said. “This is not the environment
that prevails currently, not with a 3.3-per-cent yield on
the 10-year Treasury. In our opinion, a weakening [dollar]
accompanied by a 10-year bond yield rising quickly to near
5 per cent would qualify as a disorderly depreciation.”
But disorderly means different things to different people.
Reserve Bank of New Zealand Governor Alan Bollard, who
is attempting to revive an economy that was rocked by the
February earthquake that devastated Christchurch, said after
the central bank’s latest policy meeting Thursday
that “the elevated level” of the county’s
currency is “unwelcome” and “will have
some dampening effect on economic activity.”
One of the reasons the New Zealand dollar is strong is
because investors are bailing on the U.S. currency in favour
of the “kiwi,” which offers exposure to the
county’s commodity-based economy at a time of rising
The U.S. dollar’s descent is both a blessing and
a curse for the big U.S. multinational companies.
PepsiCo Inc., the world’s largest snack food maker,
reported a 27 per cent gain in first-quarter sales, led
by sales in international markets. When PepsiCo brings that
revenue home, it amounts to a windfall profit because of
the conversion of stronger euros, pesos and other currencies
into weaker dollars. But the sinking dollar also makes planning
more difficult, especially when input costs are soaring.
“We’d rather see a steady dollar than anything
else,” Hugh Johnston, PepsiCo’s chief financial
officer, said in an interview on CNBC.