The dollar, beaten down for years, has begun to recover as the Federal Reserve's seven-month rate-cutting cycle appears near an end. Rate cuts undermine a...
The dollar, beaten down for years, has begun to recover as the Federal Reserve’s seven-month rate-cutting cycle appears near an end. Rate cuts undermine a currency by making it less attractive to global investors.
But should consumers and investors cheer the dollar on? “We need it to be soft but we don’t want it to be spiraling downward without limit,” says Global Insight Chief U.S. Economist Nigel Gault.
He thinks if the dollar stabilizes near its current $1.55 per euro level, it would be healthy for the economy.
“Thank goodness for the weak dollar,” writes High Frequency Economics Chief U.S. Economist Ian Shepherdson. It helps exporters by making U.S. goods cheaper overseas and boosting overseas earnings when converted to dollars.
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Exports of U.S. goods and services rose 5.5 percent in the first quarter, lifting results for such companies as meat processor Tyson Foods (TSN) and manufacturing conglomerate 3M (MMM).
It also has benefited technology companies. Those in the Standard & Poor’s 500 generate more than half of sales overseas, notes JPMorgan U.S. equity strategist Thomas J. Lee.
Since many foreign economies are growing faster than the United States, “we really do need the dollar’s value to be low, in order to stimulate export demand and growth,” says Gault.
In addition, a soft dollar makes imports expensive for U.S. consumers, which could cause more people to buy American. This, in turn, could spur manufacturing and jobs growth at home.
On the flip side, a stronger dollar would ease commodity prices; commodities are viewed as hedges against dollar weakness.
Shepherdson expects the dollar to slip because he thinks the Fed will cut rates in the fall, to 1.5 percent from 2 percent now. Other economists think the rate will hold steady.