Tuesday, January 04, 2005

The Weak Dollar

The Washington Post has a good article this morning on the effects of the weak dollar. Not only is it making it expensive for US tourists abroad, but already the anecdotal evidence of foreigners snapping up goods in the US is coming in.


“...Canadian shoppers have been snapping up goods made cheaper by the decline of
the greenback relative to the Canadian dollar during the past 34 months. The
Canadian dollar cost just under 83 cents yesterday, compared with 62 cents in February 2002. Luring shoppers are reports like one in Canada's National Post, which showed that a trip to malls near Buffalo could save them 20 percent on goose-down coats at Eddie Bauer and 23 percent on leather armchairs at Pottery Barn.

Far more important in economic terms is the reduction in the cost of U.S.-made machines, turbines and aircraft on global markets and the corresponding erosion in the competitiveness of similar goods made overseas. On this score, the dollar's descent has been a boon for the U.S. economy, fueling U.S. exports and prompting some foreign firms to move manufacturing operations to the United States.”

Or, in short, “if it's going to be sold in the States, you try to make it in the States.” This type of anecdotal evidence makes me think that US industrial production is going to remain strong in 2005, despite most predictions of a slowdown.

The article also helps to explain why the trade deficit is falling so slowly, focusing on the fact that people and companies are slow in making decisions such as changing suppliers, etc. As people realize that the dollar’s fall is permanent, and not just a temporary blip, the dollar’s effect will be seen much more clearly on the trade balance.

Of course, this is not to say that the weak dollar is the elixir that solves all problems...

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