As part of an enduring downward spiral of the U.S. currency exchange rate, the American dollar hit an all-time low against the euro Nov. 30, when each euro cost $1.3335.
While U.S. exporters might benefit from a weaker dollar, its devaluation might contribute to an economic recession in European countries with the euro currency and could increase U.S. purchase and travel costs.
University of Wisconsin-Madison professor of economics and public affairs Charles Engel predicted in the short term a falling dollar would make U.S. exports cheaper to the rest of the world, while costs of imports in the United States would climb.
“The effect of this might not show up for [U.S.] consumers right away but businesses who import goods will have to pay more, which might eventually translate to higher prices for consumers,” he said, adding the opposite will happen in Europe.
A weaker dollar seems it will benefit American exporters because of foreigners’ increased purchasing power. But UW economics professor Donald Hester said Europe might be heading for recession, which means people there won’t be able to buy much anyway.
An increase of European export prices might discourage the States from purchasing their goods. Since Europe’s economic recovery strongly relies on exports, this could contribute to the continent’s possible recession.
European Central Bank President Jean-Claude Trichet has said all countries should try to reduce “global imbalances” such as the recent exchange-rate swings, which he labeled as “unwelcome” and even “brutal.”
But some countries, such as China, might have a vested interest in keeping their currency at their current fixed exchange rate to the dollar, Hester said. He added that the Chinese, who export to the States more than anyone else, are not interested in importing from the States because they wish to maintain access to U.S. currency.
“The U.S. is playing a game of chicken with foreign investors, and the game will continue as long as China and Japan are willing to acquire U.S. dollars,” Hester said.
Some newspapers have speculated that China’s hesitancy to let their currency float against the dollar has greatly contributed to the dollar’s sharp decline against the euro.
Although others have voiced concern that foreign central banks selling American treasury bonds for European bonds will fuel the dollar’s decline, Engel said banks’ purchases might cause a climb in American interest rates. He said higher interest rates could deter housing purchases and business investments in the States.
Some experts hypothesize the dollar’s declining purchasing power abroad might also discourage people from journeying beyond U.S. soil.
But this effect won’t be immediate, according to Larry Chambers, President of Capitol Travel Service in Madison. Since unpleasant weather discourages many people from traveling during the colder months, the dollar’s purchasing power won’t shrink the number of international plane tickets until the “real” travel season begins in the spring, he said.
Even if spending abroad becomes a financial burden, Chambers said he thinks other countries will still lure many Americans.
“There is a feeling that Europe is much safer than a few years ago,” he said. “People still want to see the great capitals of the world. After 9/11, they want to do it even if it costs them 20 to 30 percent more.”
