A Strong Dollar?

American economic policy debate has recently taken turns familiar to Canadians - health care sustainability, debts and deficits, and most recently, the value of the dollar. 

Canadians have long fixated on the value of the Canadian dollar relative to the U.S. dollar given the large volume of trade we conduct with the United States.  Indeed, the recent appreciation of our dollar is understood as a factor in our manufacturing sector woes though our propensity to travel and shop in the U.S. welcomes a higher Canadian dollar.

For the United States, the value of their dollar has become a political issue given its decline relative to many currencies though there is some public realization that a lower U.S. dollar will boost exports and aid the U.S. recovery.  Associating the high value of the dollar with the pride of the United States might make for good politics but not always good economics.  Christina Romer provided Americans with a primer on exchange rates in Sunday’s New York Times.  According to Romer, the exchange rate is simply a price and supply and demand should determine the value of the U.S. dollar as “The exchange rate is the purview of market economics, not of the Treasury or strong-dollar ideologues.”

It is the ideological obsession with a strong dollar that seems to be bothering Romer as the average American politician is not interested in a high U.S. dollar so that their citizens can go cross-border shopping in Canada or Europe. The strong dollar is somehow equated with a strong America and in a sense it is if the high demand for and value of dollar is fueled by confidence in the safety of the U.S. economy and its institutions. A strong dollar also helps when you import so much of your oil.  Not mentioned by Romer is that a strong dollar is also beneficial if it forces your businesses to be more productive.  The crutch of a low dollar may give a short-term boost to your exports but investing in capital and technology provides a better long-term competitive advantage.  Canada's productivity lag relative to the United States was aided and abetted by the low value of its dollar.

However, a strong U.S. dollar does benefit countries that export to the United States – such as China, but China is not the only beneficiary of a stronger U.S. dollar.  French Finance Minister (and potential IMF President) Lagarde recently stated that she would like to see a strong U.S. dollar no doubt realizing the advantage to European exporters.  Canadians might also be wary of a weaker U.S. dollar.  The appreciation of the Canadian dollar relative to the U.S. dollar has been accompanied by a shift in Canada’s trade.  While the United States accounted for 87 percent of Canada’s exports in 2001, by 2010 it had declined to 75 percent.  On the other hand, we’ve diversified our exports through increases to Asia and Europe.  Moreover, our higher dollar allows us to purchase capital and equipment in the United States that will boost our long-term productivity.  As Americans will realize, whether the dollar is strong or weak, one plays the economic hand one is dealt as best as possible.

Comments

[Patrick]

I dunno, in some ways I remember the days of the 62 cent CDN dollar with a distant look and wistful sigh, but perhaps that's because I had more hair back then :). In any case, the Americans should try devaluation. They might find that an export boom suits them - but I suppose there isn't much they can do w.r.t China and that's arguably the currency against which they most want a relative decline.

[westslope]

The USA has a large number of low productivity workers that it would like to gainfully employ by lowering the exchange rate.

Beggaring they neighbour with currency devaluation is easier than undertaking pro-active structural changes. American policy elities probably wake up in the middle of the night thinking about Argentina.

Otherwise, this one piece is a disturbing trend of Americans deploying the state to remove as much risk as possible in the domestic sphere yet while continuing to increase foreign policy risk.

[Patrick]

westlope: is it 'beggar thy neighbor' if the market does it for you? Looks to me like most of the distortions on the side of keeping the US currency stronger than it otherwise would be. The Chinese peg and capital controls in particular are beyond the reach of US policy.

[Determinant]

Well, I can't see that the price of the US dollar is determined by market forces as long as China keeps its peg in place.

Though the answer to the problem of both current American economic difficulties and getting rid of China's parasitic policy is the same: higher inflation.

Just drum up some inflation until China can't stand it anymore and raises its peg. If Nick's Functional Finance post is true then the US economy should get just the medicine it needs along the way.

[happyjuggler0]

"French Finance Minister (and potential IMF President) Lagarde recently stated that she would like to see a strong U.S. dollar no doubt realizing the advantage to European exporters."

No doubt she also realizes that the Chinese Yuan is pegged to the dollar, so if the dollar rises vs the euro, then so does the yuan, with the same result for exporters to China (e.g. luxury goods makers) as well as for those competing against importers from China.

[Ben from Queens]

Didn't Stephen have a post a month or two back dealing with the fallacy that a "strong dollar" is a bad thing? Something along the lines that being able to buy more stuff from the rest of the world in exchange for fewer goods is a good thing...

[Andrew F]

Determinant:

"Just drum up some inflation until China can't stand it anymore and raises its peg."

That seems to be the strategy. Also seems to be why China is so cross about US monetary policy.

[reason]

The US is not a "small" country economically and this matters. The problem for the US is that the rest of the world wants to hold its savings in US dollars, which leads to a chronic leakage of money from the US. It has compensated this with relatively loose monetary policy (and recently also fiscal policy), but the liquidity trap has put an end to all that. It is no longer economic to invest in production capacity in the US. This is a variation of the "Dutch Disease". Variations of "small" economy analyses miss this. The chronic exchange rate deficit that the US has is no joke - it really means wealth flowing out of the country.

[miep]

Im only ever reading people that obsess about lowering the dollar value as fix for everything who complain about some mythical others doing the opposit. The Dollar is far below purchase power parity to the Euro and the Yen since forever. Did not help much so far. Doubtfull the dollar will do much good one way or another, at least the US dollar. Canada or Australia are a different story with their manchester capitalist aproach to basic resource windfall managment. Those two Dollars would be much lower if resources were managed like in Norway.