A DOLLAR DECLINE: THE GOOD, THE BAD AND THE
The U.S. Dollar’s Recent History:
Aside from the past three years, during which the dollar has
fallen approximately 37% before inflation, the dollar has
strengthened considerably since its trough in 1995. This recent
decline has occurred mostly against the Euro. Against a basket of
currencies, the dollar has declined approximately 15%.
Nevertheless, a sharp decline in the dollar is worrisome. It may
create a major shock to our economic system. While the federal
government continues to spend us into another nearly $500 billion
deficit in addition to our trade deficit which for the current year
will probably exceed $600 billion, there could be other consequences.
- Higher inflation due to the fact that the foreign goods that we
so frequently import will cost more.
- With higher inflation, the Fed will undoubtedly raise interest
- Higher interest rates will probably slow down the economy.
- A decline in the U.S. dollar would mean that foreign investors
would not want to hold U.S. investments. Currently, foreign
investors own approximately 11% of U.S. equities and buy 40% of
all newly issued U.S. government securities.
- The stock market will become even more lethargic and will
possibly decline in value. From 1985 to 1987, the U.S. dollar
declined approximately 50% which culminated in the 1987 stock
The Good News:
U.S. companies will be able to raise prices as foreign goods
producers face increased price pressures due to the increased prices
in selling to U.S. consumers as a result of a declining dollar. Over
the long run, a declining dollar would stimulate U.S. economic
activity by improving U.S. competitiveness. A weaker dollar would
cause foreigners to buy more U.S. goods and U.S. consumers less
foreign goods. However, this economic growth will probably take at
least a year, more likely longer.
The Short-Term Impact on U.S.
Generally, U.S. companies that do not have large foreign
operations but sell goods abroad will benefit the most. Their goods
will become less expensive; therefore, exports will increase. U.S.
companies that have large foreign operations will in all likelihood
not be impacted or will be negatively impacted. Companies that have
the bulk of their sales and operations in the U.S. will probably be
unaffected except that foreign competition selling goods in the U.S.
may be selling their goods at higher prices.
In the short run, as the U.S. dollar declines, U.S. consumers, the
stock market, the bond market and the economy will be negatively
impacted. Longer-term, U.S. consumers, the economy and some
U.S.-based companies will benefit. Naturally, this does not occur
overnight. The U.S. government must take the painful first step of
cutting spending and raising taxes. Only by narrowing the federal
budget deficit and perhaps even balancing it can we avert major
shocks to the economy.
For further information about evaluating the quality of a company’s
earnings, call LOUIS P. STANASOLOVICH at (412) 635-9210.
Legend Financial Advisors, Inc.®
5700 Corporate Drive, Suite 350
Pittsburgh, PA 15237-5829
Phone: (412) 635-9210
Fax: (412) 635-9213
Toll Free: (888) 236-5960
Web Site: www.legend-financial.com