A look at the dollar's long slide

[June 11, 2008]  SYDNEY, Australia (AP) -- The weak U.S. dollar is helping to push oil and gasoline prices higher, making imported goods more expensive for Americans and overseas vacations more costly. At the same time, it's helped U.S. exporters. There's been a flurry of talk from President Bush and other high-level officials in recent days, some of it seemingly contradictory, about the importance of a "strong dollar."

Some questions and answers about why the dollar's value in other countries matters at home -- and why a stronger dollar could help lead to a U.S. recovery:

Q: What is meant by a "weak" dollar and a "strong" dollar?

A: If the dollar gains against other currencies, it is said to be strengthening. Its buying power increases relative to the other currencies. If its exchange rate declines against other currencies, it is said to be weakening. It's all relative. There are advantages and disadvantages to both a strong and a weak dollar -- with economic dangers lurking at either extreme.

Q: What are the advantages of a strong dollar?

A: A strong dollar lowers the price to U.S. consumers of foreign products and services. That helps to keep inflation in check. U.S. consumers also benefit when they travel to foreign countries. It's usually a sign of a strong economy that is firing on all cylinders.

Q: And the disadvantages?

A: U.S. products become more expensive overseas, making it harder for U.S. companies to compete in foreign markets. It also makes it harder for foreign investors to buy dollar-based securities at times of heavy U.S. borrowing.

Q: What are the advantages and disadvantages of a weak dollar?

A: It's basically the mirror image. U.S. manufacturers and other exporters benefit as American products become relatively cheaper. More foreign tourists can afford to visit the United States. But it costs more for Americans to travel abroad or buy imported products, fueling inflation.

That's pretty much the situation right now. And if the dollar continues to sink, it could bring more inflation and even trigger a sell-off by foreigners of U.S. investments, making it harder to pay down the national debt and increasing risks of recession.

Q: What's the relationship between a weak dollar and oil and gasoline prices?

A: It's a direct one, since oil is generally bought and sold in dollars. The more the value of the greenback goes down, the more it costs to buy the same barrel of oil.

Of course, there are other factors involved in today's roughly $4-a-gallon gasoline prices. They include soaring demand from China and India, political turmoil in some oil-producing regions, the inability or refusal of major oil-exporting countries to increase production, and market speculation.

The weaker dollar has been a major factor, and one that could threaten the chances of a U.S. recovery.

Q: How long has this been going on?

A: The dollar has been on an extended slide against other major currencies, especially the euro and the Japanese yen, for about five years -- a period during which the U.S. trade deficit with the rest of the world generally continued to widen, requiring more borrowing from abroad and further weakening the dollar. At the same time, the economies of Europe expanded, driving up the value of the euro against the dollar. And recent sharp interest cuts by the Fed to deal with the U.S. housing and credit crises have also served to push down the dollar's value. The dollar has fallen sharply against the euro in the past year.

Q: What is the U.S. government's position on the dollar?

A: U.S. officials, usually the treasury secretary, have long repeated the mantra that a strong dollar is in the nation's best interest. Yet the administration did nothing to back up its assertion with action and many policy-makers clearly welcomed the slide, mainly because it helped to keep U.S. exports expanding, a rare bright spot in a troubled economy.

Over the last week, however, officials have signaled that they don't want further declines. Bush, Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke have all issued statements backing the need for a strong dollar and expressing concern about the economy.

"A strong dollar is in our nation's interests. It is in the interests of the global economy," Bush said Monday as he embarked on a European tour.

Q: What can be done to stop or reverse the dollar slide?

A: Comments by those three officials, which some call jawboning, helped nudge up the dollar on Monday and Tuesday, especially against the euro and the yen. Some traders believe the dollar's slump is nearing an end. But the dollar remained under pressure and options for government action were limited.

The Fed could start raising interest rates again. That would strengthen the dollar by making U.S. investments more attractive to foreign investors. But it could be a blow to an already fragile economy and increase recession risks.

The other option is for the government to buy U.S. dollars on international currency markets -- called intervention -- either acting on its own or in concert with other countries. Some European allies have suggested this course of action, blaming the dollar's slump for infecting their own countries with inflation.

To do this, the government could draw down its supply of euros, yen and other foreign currency stockpiles -- on deposit with the New York Federal Reserve Bank -- and buy dollars.

Q: How likely is that to happen or do much good?

A: There have been mixed signals. Paulson, the treasury secretary, said in separate television interviews on Monday and Tuesday that the administration was taking no tools off the table that it might use to manage the dollar's value -- including the use of government intervention to push the dollar's value higher.

But Bush himself, speaking to reporters in Slovenia on Tuesday, signaled little interest in such a course, suggesting instead "that relative value of economies will end up setting the proper valuation of the dollar." The U.S. hasn't intervened in currency markets since Bush took office in 2001.

And intervening to buy dollars could backfire. For one thing, it would take great sums of money to make any difference. The foreign exchange market is the largest in the world, with over $1 trillion traded each day. Seeing the U.S. trying to prop up the greenback by buying dollars could be taken as a sign of desperation and possible prompt a renewed round of selling.

[Associated Press; By TOM RAUM]

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