McClatchy Washington Bureau

Print This Article

WASHINGTON — The U.S. dollar's slump on world currency markets boosts sales prospects for U.S. exporters but could mean higher prices for American consumers already smarting from rising food and energy costs.

A weak dollar increases the chances of higher inflation. That could put the Federal Reserve in a tough position of having to choose between tolerating rising inflation or raising interest rates to curb it — even if that makes the emerging economic slowdown worse.

The dollar has weakened steadily for more than a year. The trend accelerated after the Fed's surprise decision Tuesday to lower its benchmark federal funds rate by a half-point. This was evident on Friday, when one euro, the currency of 13 nations in the European Union, bought a record $1.4078. Similarly, one Canadian dollar was worth about one U.S. dollar, the first time the two currencies have been at parity since 1976. A year ago, the euro bought almost $1.27, and a U.S. dollar bought 1.12 Canadian dollars.

What do those numbers mean for Americans?

For apple growers in Washington or Midwest grain farmers, their products are now more price-competitive abroad. So are exports from Minnesota dairy farmers, Texas cattlemen and Florida citrus growers. Europeans, Asians and Latin Americans can buy U.S.-made products at cheaper prices.

For manufacturers, it's not as clear. Airplanes made by Boeing and automobiles assembled in Detroit are now cheaper abroad, but both contain high levels of parts made overseas, so the impact of the slumping dollar is muddied.

For American consumers, whose spending drives two-thirds of the U.S. economy and who are increasingly accustomed to low-priced consumer goods from China and elsewhere, higher prices may be coming.

"Anytime the dollar gets weaker, items you import for sale in the United States get more expensive. That's anything from a BMW to plastic forks that are manufactured in China," said Patricia Edwards, a retail analyst for Wentworth Hausen and Violich, an investment firm in Seattle.

For Wal-Mart, the largest importer of Chinese-made goods, the weak dollar is unlikely to squeeze it significantly anytime soon since the company has standing foreign contracts in dollars and gets almost a fifth of its profits from stores abroad, Edwards said.

But as Wal-Mart signs contracts to buy foreign goods with depreciating dollars, it'll have to pay more — and may pass on those higher costs to shoppers as higher prices.

"They are shielded in the short run. If we have a longer-term issue with the dollar ... and our economy stays on its tush, it's going to be more difficult down the road," Edwards said. "It's not going to be something you see in the next two months or on the holiday shelves."

Wal-Mart spokesman John Simley declined to comment.

The biggest risk to the U.S. economy from a weak dollar is that it will drive up inflation, the rise of prices across the economy, as import prices climb. The weak dollar also drives up the price of oil and other commodities that are traded internationally in dollar contracts. Foreign producers of such commodities raise their prices to ensure that they retain the same purchasing power they had before the dollar weakened.

All these higher prices add inflationary pressure on the U.S. economy, but how much pressure is an open question. Oil prices climbed from $50 a barrel in 2005 to more than $80 a barrel last week, yet the overall U.S. inflation rate remained at about 2 percent over the past year.

"Gasoline prices moved up, and we didn't see it push through into broader inflationary pressures," said Douglas Holtz-Eakin, an economist and former director of the Congressional Budget Office. "It's far from obvious that you will see an inflationary push" from the weaker dollar.

That may depend on how low the dollar goes and how long it stays low.

Foreigners held more than 27 percent of U.S. government debt last year. The dollar's slide imperils such investments made by China, Japan, Saudi Arabia, Great Britain and elsewhere. They may switch some investments into euros, whose value is rising. The European Union's economic outlook is more robust for now than the U.S. economy's is.

One long-term risk from a weak dollar is that foreigners could demand higher interest rates before buying more Treasury bonds. Forcing interest rates up when the Fed is lowering them to try to keep the economy from pitching into recession illustrates the danger of U.S. dependence on foreign loans to finance trade and federal budget deficits.

"If the dollar falls and people start to invest in euros as a reserve currency and less in dollars, we may have to raise interest rates to attract capital from abroad. It would increase the borrowing costs on the government and everyone else," said Bob Bixby, executive director of the Concord Coalition, a federal budget-watchdog organization.

To date, the dollar's slide against the world's major currencies has been orderly.

However, Bixby noted, "nobody can say exactly when some panic mode may start. These things can happen overnight, even for irrational reasons. We would be in a lot better shape ... if we were using our own savings instead of being heavily dependent on foreign capital."