If you have been paying attention to the relative strength of the U.S. dollar, you may have noticed that as the dollar slides, the stock market rises. And with no end to deficit spending in sight, the dollar's decline may have a way to go.
While the Obama administration and Treasury Secretary Henry Paulson claim to support a strong dollar, they may actually support a weak currency because, at least in the short term, it helps the U.S. economy more than the strong one they publicly endorse. The dollar has declined by 8 percent during Paulson's 15 months in office.
``The dollar is in a quasi-sweet spot,'' says Joseph Quinlan, chief market strategist at Bank of America Corp. in Charlotte, North Carolina. ``It's dropped enough that it's creating an earnings upside for U.S. multinationals, while I expect many foreign companies to hold the line on prices they charge U.S. consumers.'' When faced with a falling dollar, foreign companies tend to absorb the hit to profits or try to cut costs rather than charging more.
According to Boomberg, when asked how Paulson, 61, views the dollar's recent slide, his spokeswoman, Brookly McLaughlin, refers to recent statements from him that reiterate the official U.S. policy since Robert Rubin ran the Treasury under President Bill Clinton: ``I feel very strongly that a strong dollar is in our nation's interest.'' As Treasury secretary, he can't be expected to say anything else. This is because The U.S. needs to be able to sell Treasury bonds to raise capital to fund its record deficits. The Treasury secretary has to say he supports a strong dollar, because if he doesn't, no one would invest in the ballooning U.S. debt.
The weak dollar makes U.S. products cheaper overseas, and the demand from overseas is a welcome boost to the U.S. economy as the two-year housing recession and tighter credit standards threaten to suppress consumer spending. Bloomberg says trade added 1.3 percentage points to growth in the second quarter, the most since 1996 and the first time since 1991 that exports contributed more than consumer spending to the economic expansion.
A major threat connected to a weak dollar is inflation, yet the Fed's preferred measure of inflation, the personal consumption expenditures core price index, rose 1.8 percent in August from a year ago, the smallest gain since February 2004 and within Fed Chairman Ben S. Bernanke's stated comfort zone.
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