South-Western College Publishing - Economics  
Dollar Decline Debated
Subject Exchange Rate, Trade-Weighted Exchange Rate
Topic International Finance
Key Words Depreciation, Appreciation, Exchange Rate, Trade-weighted Exchange Rate
News Story

Since the beginning of July, the dollar has fallen about 20.7 percent against the yen and 12.7 percent against the German mark. Although American consumers love a strong dollar3/4it means that the imported goods they buy are lower in price and vacations in other countries are cheaper3/4American businesses prefer a weaker dollar. When the dollar is weak, exports rise and the threat from foreign competition is lowered. This recent fall of the dollar should be welcome news for American companies, but there is no cheering yet.

While the dollar has depreciated against the yen and mark, it has remained relatively strong against the Canadian dollar and the Mexican peso, the US's major trading partners. Accordingly, the trade-weighted exchange rate, a measure of each currency's impact on US trade, has only declined 4.8 percent. This is not enough of a change to make a big difference, because currency fluctuations affect earnings almost immediately, but take a longer time to have a broader economic impact.

As a result of the dollar's slide, importers will be paying more. Whether this will have an appreciable effect on inflation is uncertain because the increased cost of imported goods may be offset by reduced profit margins if there is slack demand.

(Updated November 11, 1998)
Questions

1. American automobile companies view Japanese imports as their major competitor. Why were they unhappy when the dollar appreciated relative to the yen? Why are they now much happier?

2. Many American companies have operations in Germany and Japan. How should they feel about the dollar's new position in those countries?

3. The article tries to show that exporters and importers have opposite feelings about the strength of the dollar. Should the dollar be strong or should it be weak? What do you base your conclusion on?

Source Jonathon Fuerbringer, "Finding a Balance in the Dollar's Slide", The New York Times, October 16, 1998.

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