The sharp decline of the U.S. dollar since 2000 is affecting a broad swath of the world’s population, with its drop on global markets being blamed at least in part for misfortunes as diverse as labor strikes in the Middle East, lost jobs in Europe and the end of an era of globe-trotting rich Americans.
It marks a shift for Americans in the global economy. In times of strength, a mightier dollar allowed Americans to feed their insatiable appetite for foreign goods at cheap prices while providing Yankees abroad with virtually unrivaled economic clout. But now, as the United States struggles to fend off a recession, observers say the less lofty dollar is having both a tangible and intangible diminishing effect.
“The dollar was the dominant force in world economics for 100 years – we had no competition,” said C. Fred Bergsten, an American economist and director of the Washington-based Peterson Institute for International Economics. “There was no other economy close to the size of the United States. But all that is now changing.”
The dollar is down more than 40 percent against the euro over the past seven years, taking a particularly sharp drop last month. Despite a bit of a rebound in recent weeks, the dollar is still off nearly 12 percent since Jan. 11, when it hit its peak for 2007.
For now, that drop is allowing the U.S. economy to reap rewards. American products have become exceedingly competitive, boosting exports ranging from Caterpillar tractors to Boeing jumbo jets that are now relative blue-light specials in the global marketplace. Using the same logic of chasing cheaper local production costs that has driven many U.S. factories to China, a few iconic European companies, including Airbus, are set to shift some manufacturing lines to the United States.
But for untold millions worldwide, the weak dollar has emerged as a troubling dark spot. Take Ngengi Mungai, a Nairobi coffee exporter trapped between the weaker dollar and the rapidly appreciating Kenyan shilling – which gained as much as 12 percent against the dollar this year amid an export-driven economic surge across much of Africa. His coffee sales overseas, as with the bulk of global commodities, are priced in weaker dollars. But he must then convert them into stronger shillings to cover his local costs for local labor, materials, even the clothes on his back. It has cut sharply into his annual income.
“Basically,” Mungai said, “it’s bad.”
It has left many wondering whether the dollar has lost its bling for good. Even rapper Jay-Z dissed the dollar in his recent video, “Blue Magic.” In scenes celebrating the excess of wealth in Manhattan’s shimmering glass canyons, the cameras cut repeatedly not to images of $100 bills – but of crisp, 500 euro notes.
Though still the primary choice for global reserves and commodities, some countries have begun to diversify their dollar holdings, while a nascent push is afoot to re-price some commodities in currencies other than the dollar. In May, Kuwait dropped its currency peg to the dollar and other oil-rich Gulf states have threatened to follow. Perhaps most telling: In recent months, the euro surpassed the dollar as the currency with the largest global circulation.
In very real terms, it has forced Americans to rethink their lust for foreign goods. Sales of luxury, British-made Jaguars and Land Rovers, for instance, are declining in the United States because of the weak dollar, while fewer North American tourists – a 10 percent drop in the third quarter of 2007 compared with the same period last year – treated themselves to trips to England.
The chink in the dollar’s armor has dealt a blow to American pride – at least to the kind of pride that comes with buying power.
Nowhere is that more visible than with Americans overseas. “It’s changed our lifestyle,” said Lauren Amlani, 48, who moved to Paris from California with her husband and young son in March 2006. “A meal with pizza and drinks for the three of us comes to over $75. That’s ridiculous!”
Amlani’s husband, Aslam, a project manager at Disneyland Paris, is paid in dollars. To compensate for the plunge of the dollar against the euro, the Amlanis are buying clothes and electronics in the United States and hauling them back to Paris.
With the exception of November, when the dollar dropped sharply after bearish remarks by Chinese officials, the fall has been gradual. It is unclear what will happen in the future. The dollar has fallen because of a combination of fears over the U.S. economy, including the subprime mortgage crisis that may worsen.
Although considered unlikely, analysts say a more rapid decline could prove disastrous. A global run on the dollar would force the Federal Reserve to hike interest rates to prop up the U.S. currency just as lower interest rates may be needed to stimulate the domestic economy.
Already, however, the impact of the weaker dollar is growing. Rolls-Royce has proposed moving some operations from Liverpool to its factory in Mount Vernon, Ohio. Airbus has said it will shift more of its production to the United States, home turf of rival Boeing, to offset the cost of the stronger euro. As the dollar has weakened over the past seven years, Airbus has opened assembly lines and other operations in Wichita and Mobile, Ala.; as well as in Moscow and Beijing.
“Every time the euro increases by 10 cents towards the dollar we lose $1 billion in our operations,” said an Airbus official at the company’s headquarters in Toulouse, France. “Aircraft are sold in U.S. dollars, but most of our production costs are paid in euros.”
Losses in Europe have been blunted, however, because fewer euros now buy more raw materials that continue to be priced in dollars. In addition, the British pound has depreciated recently over investor fears that England’s real estate market may be vulnerable to the same factors that caused the subprime mortgage crisis in the United States.
Many nations that have pegged their currencies to the dollar have become boxed in by the Fed’s moves to lower interest rates. While that may be wise for policymakers in the United States, where the fear is slipping into recession, it is exactly the wrong medicine for red-hot economies such as those in the Persian Gulf that are in far greater risk of overheating from a massive, oil-fueled economic expansion.
The dramatic surge in oil revenue along with the weakening dollar has sparked a rise in inflation in the Gulf states — hurting most those who have the least. In recent months, it has wiped out much of the gains from years of hard labor for the thousands of South Asian workers who moved to Dubai for a piece of its multibillion-dollar construction boom. With employers slow to raise salaries as low as $109 a month, workers’ savings have diminished in buying power as costs have jumped for vegetables, cooking gas and other essentials. This has triggered wage strikes and a rock-throwing protest this fall that set back construction of the 150-story Burj Dubai, planned to be the world’s tallest building.
“We don’t have a single penny,” said Ram Chandra, a 33-year-old mason who moved to the United Arab Emirates from India five years ago to seek his fortune in a sand-blown and crowded construction camp on the fringes of the desert. Back home in India, where the dollar has fallen 14 percent against the rupee in the past 18 months, the remittances he has sent to his family have steadily lost value.
The declining dollar’s role in fueling inflation has become a piÂ¿ata for barbs across the Muslim world, where furious residents and leaders, including Iran’s President Mahmoud Ahmadinejad, have sought to turn the weaker greenback into a new rallying point for anti-Americanism. “They get our oil and give us a worthless piece of paper,” Ahmadinejad told reporters after the OPEC summit in the Saudi capital of Riyadh last month.
Some countries with strict controls over their currencies have managed to share in the U.S. windfall from the dollar’s drop. Vietnam, for instance, where the tightly controlled currency has stayed relatively constant against the dollar, is enjoying an influx of investors fleeing nearby Thailand – where the baht’s sharp rise against the dollar has made doing business there far less attractive.
In China, where the currency still trades on a narrow, government-controlled band linked to the dollar, authorities have resisted global pressure to allow its currency to appreciate faster. The Chinese currency has gained about 11 percent against the dollar since 2005. But by keeping the currency relatively weak, Chinese companies have managed to ride the weak-dollar export boom – making their products even cheaper in countries where the greenback has sharply dropped.
But now, some in China are turning their noses up at the dollar. Lin Jing, a sales manager at Shanghai Shuangyuan Import & Export Co., which exports garlic oil, said the company has begun to demand euros from its overseas customers instead of dollars. “The use of euros enables us to shy away from losses caused by the conversion between the [Chinese currency] and the weakened dollar,” he said.