A weakening dollar does very little to help increase exports or create jobs. Our competitors will continue to use tariffs, currency pegs and taxes to ensure that they maintain an advantage. More importantly, a weakening currency leads to massive capital flight as investors pull their money out of the US and put it into markets with a stable or strengthening currency. We already see signs of this happening.
The
http://online.wsj.com/article/SB10001424052748703811604574532110208089606.html">Wall Street Journal ran a good piece debunking the weak dollar mythos this weekend:
Wall Street's mantra is that a weak dollar is a good thing, boosting U.S. exports and, by extension, the economy and employment.
But any export surge might not be big enough—or at least come quickly enough—to outweigh the potential downsides of a weaker currency.
The question will be front-and-center when the Census Bureau releases September trade data on Friday morning. Economists estimate that the U.S. trade deficit widened to $32 billion from $30.7 billion in August.
To the extent the wider gap represents a rising U.S. thirst for crude oil and other imported stuff, it could be the latest sign of economic revival. Still, many economists would like to see the deficit shrink again, arguing global imbalances contributed to the latest crisis.
More-frugal U.S. consumers are making a difference. Collapsing consumer demand was a big factor in halving the gap during the past year.
The U.S. dollar's recent weakness might help, too, by making U.S. exports more competitive overseas.
But exports grew in the 1990s, even as the dollar strengthened, notes Brown Brothers Harriman currency strategist Marc Chandler.
Recent academic research has raised questions about just how exchange rates affect trade. Suffice it to say the relationship is complex.
The dreaded U.S. trade deficit with China rose 33% between 2005 and 2008, even as the dollar fell 18% against the yuan.
U.S. exports to China rose during that time, but Chinese exports to the U.S. rose even more, despite China's rising currency.
There is little doubt that, to the extent currency fluctuations affect trade, they do so with a very long lag—probably up to two years.
The Federal Reserve's trade-weighted dollar index, which measures the greenback against a broad basket of currencies including the Chinese yuan, has fallen nearly 22% since 2002. Some argue that the 63% increase in U.S. exports during that time is no coincidence.
But the risks of a precipitous dollar decline—including runaway inflation and higher interest rates as foreign creditors seek greater returns for lending to the U.S.—are clear and may not be worth the hope of a distant, possibly slim, boost to exports.