Falling Dollar May Not Be So Bad After All
I have really got a good global economics lesson this week by learning about how the dollar is dropping in value against the Korean won. Thanks everyone that commented on this issue this week. Through your comments and some recent news articles I have read, I got a good understanding of what is going on with the dollar. The sliding dollar, depending on who you talk to, may not be a bad thing. First, here is the opinion on the dollar’s slide from Thomas Friedman of the New York Times.
… global markets are realizing that we have two major vulnerabilities that this the latest rise of the won is a reaction to its artificial repression by the government. Other currencies underwent appreciation against the greenback in the past few years, but Seoul officials kept the value of the local currency at a low level to keep up export momentum. The government should have allowed its gradual appreciation instead of containing the upward pressure at huge cost. Now the dam has almost burst and the damage for businesses is as great as it is sudden.administration doesn’t want to address: We are importing too much oil, so the dollar’s strength is being sapped as oil prices continue to rise. And we are importing too much capital, because we are saving too little and spending too much, as both a society and a government.
“When people ask what we are doing about these twin vulnerabilities, they have a hard time coming up with an answer,” noted Robert Hormats, the vice chairman of Goldman Sachs International. “There is no energy policy and no real effort to reduce our voracious demand of foreign capital. The U.S. pulled in 80 percent of total world savings last year [largely to finance our consumption].” That’s a big reason why some “43 percent of all U.S. Treasury bills, notes and bonds are now held by foreigners,” Mr. Hormats said.
And the foreign holders of all those bonds are listening to our debate. They are listening to a country that is refusing to raise taxes, and an administration talking about borrowing an additional $2 trillion so Americans can invest some of their Social Security money in stocks. If that happened, it would almost certainly weaken the dollar, further depreciating the U.S. Treasury bonds held by all those foreigners.
On Monday, the Bank of Korea said it planned to diversify more of its reserves into nondollar assets, after years of holding too many low-yielding and depreciating U.S. government securities. The fear that this could become a trend sparked a major sell-off in U.S. equity markets on Tuesday. To calm the markets, the Koreans said the next day that they had no intention of selling their dollars.
Oh, good. Now I’m relieved.
“These countries don’t have to dump dollars – they just have to reduce their purchases of them for the dollar to be severely affected,” Mr. Hormats noted. “Korea is the fourth-largest holder of dollar reserves. … You don’t want others to see them diversifying and say, ‘We’d better do that, too, so that we’re not the last ones out.’ Remember, the October 1987 stock market crash began with a currency crisis.”
When a country lives on borrowed time, borrowed money and borrowed energy, it is just begging the markets to discipline it in their own way at their own time. As I said, usually the markets do it in an orderly way – except when they don’t.
Friedman is actually a pretty good columnist if you are not familiar with him. Unlike other NY Times columnists he is usually pretty fair and his points about using to much oil and the government spending to much are valid. Here is the Korea Times take on this issue.
… the latest rise of the won is a reaction to its artificial repression by the government. Other currencies underwent appreciation against the greenback in the past few years, but Seoul officials kept the value of the local currency at a low level to keep up export momentum. The government should have allowed its gradual appreciation instead of containing the upward pressure at huge cost. Now the dam has almost burst and the damage for businesses is as great as it is sudden.
Apparently those with the most to lose are going to be the Korean exporters. They are going to have to adjust their business strategies to not depend on exports to maintain economic growth in the country. The falling dollar is causing their exported goods to cost more which means more Americans will buy either American or other country’s cheaper goods.
… the answers lie in the industrial sector. Large businesses appear somewhat ready for the strong won, but small- and medium-sized firms remain helpless against declining export profitability. So the policy supports should be directed to help smaller firms armed with advanced hedging techniques against currency risks. Equal efforts should be made to help enhance their competitiveness through cost cutting, technology development and strategic restructuring.
Barring heavy government intervention, the exchange rate will likely enter the three-digit range in no time. But we all know the parity rate was in the 800-won range before the 1997-98 currency crisis. The nation is just going back to where it once was, although the process of rebuilding will be harder than the initial construction.
It appears that the Korea Times is in agreement with Friedman’s assessment that the dollars slide will be okay only if it doesn’t happen to quickly. Let’s keep our fingers crossed. In the mean time I guess I am going to have to get used to an exchange rate in the 800 won range. I guess I will be buying less mink blankets from Itaewon to send home as gifts in the future.
