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Decline of the dollar

Why are so many people cheering the dollar’s breathtaking fall against the Japanese yen and German mark?
Because a weaker dollar means U.S. products cost less abroad, which should boost exports.
If that’s so, why is the U.S. merchandise deficit for 1994 expected to hit $170 billion, even though the dollar spent most of the year heading downward? Indeed, why has the dollar’s general decline since 1985 failed to close the trade gap?
The simple answer to both questions is that even as exports have grown, the nation’s appetite for imports has expanded at an even faster rate. The more complicated answer is that there are no simple answers to these questions.
Similarly, the current collapse of the U.S. currency defies quick and easy explanations. Some economists merely shrug when the question is put to them. Others see multiple culprits.
One is general belief that the Fed is not inclined to raise short-term rates in the near future. Another is concern about the Mexican crisis.
And a number of observers see no coincidence in the fact that the dollar’s nosedive hit warp speed right after the U.S. Senate failed to pass the balanced-budget amendment.
So, is the dollar’s fall to postwar lows against the yen and mark reason to worry or celebrate?
A little of both. Exports have become central to the health of the U.S. economy, and a bargain-basement dollar gives American producers every opportunity to pump up sales abroad.
Yet currency traders are sending a message about the federal deficit and Washington’s unwillingness to confront it that should be heeded.
For the export-oriented Rochester area, dollar fluctuations are no small matter. Nor are they a simple matter.
Perhaps as significant as the record merchandise trade deficit is the change in its character over the last half-decade. Capital goods imports have grown from one-fifth to nearly one-third of the total.
In other words, don’t point a finger at kids buying CDs and VCRs.
And don’t expect manufacturers that need to import higher-priced components to have an insurmountable edge in the global marketplace.
–Rochester Business Journal

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