Believe it or not, a weaker dollar isn't ALL bad

June 18, 2:42 PMNY Business News ExaminerJavier David

Your correspondent is feeling quite the econ-geek today, so here goes:  

Earlier, the Philadelphia Federal Reserve released data that illustrated unexpected strength in the mid-Atlantic manufacturing sector. The benchmark index hit its highest level in nearly nine months, and far exceeded market estimates.

Even controlling for the fact that the Philly Fed index is notoriously volatile, it bears mentioning that a weaker dollar does have a beneficial impact on sectors such as manufacturing that are dependent on overseas sales.  

A weak currency translates into cheaper goods in foreign markets, which can spur an increase in sales that make multinational corporations more competitive in those markets. Prime examples include aluminum manufacturer Alcoa and chemical company Dupont, both of which are seeing a bump in their stock prices today on the heels of the Philly Fed news. While it may not account for the entire narrative, a soft dollar is at least part of the story. 

While a weak currency can create real difficulties – spurring inflation, driving bond-yields higher and unnerving foreign investors – it can eventually help beleaguered automobile makers generate more overseas sales once they restructure/emerge from bankruptcy. Today, Goldman Sachs raised its outlook on the U.S. auto sector, citing improved confidence and “pent-up” demand. 

That said, the dollar’s rally from the mid-1990s to the early 2000s, combined with automation and the rise of low-cost manufacturing havens in Asia, has decimated the once dominant U.S. manufacturing sector, which now plays a less significant role in the U.S. economy than it once did. As of 2006, manufacturing activity accounted for roughly 12 percent of gross domestic product (GDP).  Globally, the United States is ranked fairly low with respect to manufacturing’s contribution to the economy.