During the Great Depression, New York’s ebullient mayor Fiorello LaGuardia dubbed the popular marble lions that frame the steps of the city’s main library Patience and Fortitude — a reference to the strengths the city’s denizens would need to summon to survive the economic tumult.
Robert Brown, chief investment officer at Genworth Financial Asset Management, contends Americans eventually will need to call on those same attributes if the U.S. dollar continues to fall as he and many other analysts expect.
“The forces are so clear cut, so self-reinforcing,” he said of the decline. “Nobody can figure out the timing.”
While the economic shift likely would draw out some winners in the U.S. economy, such as companies that sell goods and services overseas, it would also likely sharply reduce America’s purchasing power and cause seismic shifts in some sectors of the economy. For example, factories once deemed too expensive to operate in the United States might again turn out products such as clothing that could become expensive to import.
The dollar’s decline has taken place over a period of years, but more recent pullbacks have tested historical benchmarks. The dollar, which began to weaken broadly in early 2002, has fallen more than 50 percent from its October 2000 trading peak against the euro. It has recently come close to hitting its record low against the 13-nation currency and is near a 26-year low against the British pound.
“Over the long term, having your currency fall 50 percent is another force for change in the economy and that will create social pain. There are slices of the economy that will have to get restructured, that will have to go away. They’ll have to get replaced with other ones,” Brown said.
Initially, the changes could appear mild, even pleasant. U.S. companies that sell overseas can reap big gains when they make sales in a stronger currency and then translate that back to dollars. This past week, IBM said its first-quarter revenue rose 7 percent to $22 billion. However, without the benefit IBM enjoyed by converting foreign revenue to dollars, sales would have risen only 4 percent.
“It makes us more competitive in the goods we sell,” said Axel Merk, noting one of benefit of a declining dollar. However, he sees room for concern. His Merk Hard Currency Fund largely invests in currencies other than the dollar.
And of course a weaker dollar means travelers to the United States from places such as Europe would see “sale” signs everywhere they looked. Even those staying longer, such as foreign students, could find it less expensive to study in the United States.
“The falling dollar has been like a giant life-preserver for the U.S. travel industry,” said Allen Kay, a spokesman for the Travel Industry Association. He said weakness in the number of foreigners traveling to the U.S. since the Sept. 11, 2001, attacks would have been much worse had it not been for a falling dollar.
He said those government agencies and businesses seeking tourists from abroad are highlighting the weak dollar in their advertising.
“If you’re trying to get more people to get here from Europe you can’t ignore the fact that the U.S. is the best bargain it’s been years,” Kay said.
Cheaper prices for U.S. assets could even help portions of the struggling housing market, said Quincy Krosby, chief investment strategist at The Hartford.
“I think this is going to accelerate foreign purchases of U.S. property,” she said.
European buyers, she said, could, buy second homes in the United States in not only bustling cities but also, for example, near golf resorts.
Still, while some sectors of the economy might benefit from a flagging dollar, many observers expect the longer-term ramifications will pose difficulties for the U.S. economy.
“If you want to take over companies or if you want to expand it makes it harder,” said Merk, adding that U.S. assets become less-expensive targets.
“You can’t defend yourself. Your currency is worth less in an international arena and we’re in a globalized world. You’re going to be up for sale. All U.S. assets are up for sale,” he said.
While analysts might disagree on how widespread some pain will be as the dollar slips, all agree no one would benefit from a crash.
“The most important aspect of a decline in any currency is that it’s orderly,” Krosby said. “This has been orderly,” she said of the pullback.
She contends the absence of comment about the dollar following the recent gathering of the Group of Seven wealthiest nations indicates the G-7 is expecting a gradual decline.
Forces continue to weigh on the dollar, however. Some investors see interest rates as more likely to fall as the economy slows in the United States, whereas interest rates are rising amid stronger economic growth, making their returns more attractive. In addition, governments from China to Russia to Korea have announced plans to diversify their holdings beyond the dollar, long the world’s sole reserve currency. And while they don’t want to see the value of their existing sizable dollar holdings decline, they can find value in emergent currencies elsewhere.
“If U.S. assets become a bit less attractive, the country that was putting a dollar a day into the U.S. might put 50 cents or they might hold off for a week or two,” said Laura Ostrander, lead manager for the Columbia Strategic Income Fund.
Brown said if the value of the dollar drops by half, as he predicts, there could be wide-ranging social changes as well as poorer consumers were forced to pay more for goods now produced abroad.
“One of the most potent forces may just be most fundamentally a change in the standard of living,” he said, questioning what would happen if the dollar fell by half but prices doubled. “That will be one more reason why the decade ahead will be at a societal level a little less easygoing,” he said.
“If you’re going to take a trip overseas, I suggest you take it this year and don’t wait.”