Think Inc.
A forum for Hawaii's
business community to discuss
current events and issues.
Think Inc.
A forum for Hawaii's
business community to discuss
current events and issues.
Six months ago the talk of international financial markets was the surprising strength of the U.S. dollar. Between September 2001 and February 2002, the dollar appreciated 7 percent relative to the euro and 17 percent relative to the Japanese yen. Some forecasters were predicting that the dollar would climb to &YEN140 this year.
By Jack P. Suyderhoud
Since then, the news has been the dollar's steep fall from grace, rather than its strength. Between April and July of this year, the dollar depreciated 15 percent versus the euro (so that so-called "parity," a one-for-one exchange rate, has been achieved and even surpassed). The dollar exchange rate is down 14 percent relative to the yen, 13 percent relative to the Korean won, 7 percent compared to the Thai baht and the Australian dollar.
It would be nice to have been able to predict these exchange rate fluctuations. However, as noted by Federal Reserve Chairman Alan Greenspan in last week's testimony to Congress, "exchange-rate movements depend on shifting perceptions of the relative returns from investing in different countries and on the myriad influences on relative tendencies to import and export. The net effect of these factors over any future time period is extraordinarily difficult to assess in advance."
Yet there were signs that the dollar's strength earlier this year would not last. Two important factors were at work. First, the United States has had persistent and increasing trade deficits with the rest of the world. This means that more dollars flow overseas from our purchases of foreign goods and services than what foreigners want in order to buy goods and services from us. In the past the excess dollars have come back in the form of foreign purchases of U.S. assets such as property, stocks and bonds. Even before the fall of the dollar, concerns were being raised that this imbalance was not sustainable.
But like an airplane crash, it is usually the untimely coincidence of several unfavorable events that brings a financial tumble.
The second factor affecting the value of the dollar was a lack of investor confidence. The meltdown of the U.S. equity market along with the crisis of corporate governance and accounting standards has reduced the willingness of foreigners to recycle those trade deficit dollars by investing them in the United States. As a result, the demand for dollars declined, the supply rose and the price of the dollar, the exchange rate, plummeted.
Not all people are unhappy about the decline in the value of the dollar. U.S. exporters, including those of us in Hawaii who export services to Japanese tourists, will see an increase in demand for their products because they will be cheaper to foreigners. Countries such as China, Hong Kong and Malaysia, will see an improvement in their competitive positions because they have tied their currencies directly to the U.S. dollar through fixed exchange rates.
The slide in the value of the dollar will stop when the trade deficit improves and when investor confidence in U.S. capital markets returns. Both of these will take time.
Jack P. Suyderhoud is a professor of business economics with the University of Hawaii College of Business Administration. Reach him at SUYDER@cba.hawaii.edu.
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