September 21, 2007
Value of Dollar Falls to New Low Against the Euro
By VIKAS BAJAJ and IAN AUSTEN
Investors dumped dollars yesterday, sending the euro to a record high and putting the American currency at par with the Canadian dollar for the first time in more than 30 years.
In practical terms, the recent drop in the dollar’s value is making Boeing jetliners and Manhattan pieds-à-terre a lot cheaper for Europeans and Canadians, while Americans will have to pay more while on vacation in Paris or when buying snowmobiles made in Quebec.
While the dollar has generally been drifting down against both currencies, along with the British pound, for much of this decade, its fall has gathered pace in recent weeks as traders foresee a slowing American economy while expecting more robust growth overseas.
The Federal Reserve’s decision this week to cut interest rates put further pressure on the dollar by making investment returns in other countries comparatively more lucrative.
As American assets become cheaper to buyers overseas, foreigners may step up their purchase of businesses and land here, creating political and cultural tensions. Yesterday, a stock exchange from Dubai, on the Persian Gulf, announced plans to take a sizable stake in Nasdaq, drawing a mixed response in Washington. And a prominent private equity firm, the Carlyle Group, sold a minority stake to the Abu Dhabi government.
The impact of the falling dollar is rippling through the world and American economies in numerous ways. It will give an edge to American manufacturers and has already helped lift exports by more than 11 percent in the first eight months of the year. Businesses with large foreign operations can expect a lift in profits when they convert their overseas earnings into dollars.
On the other side of the equation, the decline in the American currency is helping push up commodity prices, most of which are denominated in dollars, and kindling fears that inflation could rise. Crude oil futures surged to $83.32 a barrel yesterday, up 2 percent from the day before and up 37 percent for the year. Long-term bonds fell sharply in value and gold prices were up 1.4 percent, to $733.26 a troy ounce.
One euro now buys $1.4065, the first time in the common European currency’s nine-year history that it has crossed the $1.40 mark. And one dollar now buys $1.0008 Canadian dollars, the first time that the two currencies have traded that closely since late 1976.
The American currency fell nearly 1 percent against a basket of six major world currencies yesterday, and is down 8.4 percent in the last 12 months. The American stock market fell modestly yesterday after posting two days of gains.
Many traders and economists predict that the dollar will weaken further because the American economy is expected to underperform its biggest trading partners for some time. “The market is pricing in a shift in Fed policy downward, and the rest of the world is not matching,” said Carl B. Weinberg, chief global economist at High Frequency Economics. “That can only mean a cheaper dollar.”
In Washington, the administration and Congress were preoccupied with the problems in the housing economy and there was little talk of the dollar. President Bush expressed confidence in the economy. “The fundamentals of our nation’s economy are strong,” he said at a news conference. “There is no question that there is some unsettling times in the housing market.”
Senator Charles E. Schumer, Democrat of New York, did call on the Bush administration to review the Nasdaq deal closely, but other Democratic leaders, including House Speaker Nancy Pelosi of California and Representative Barney Frank of Massachusetts, chairman of the Financial Services Committee, said they were not alarmed by the transaction.
More than a year ago, opposition from lawmakers forced another Dubai-owned company to back out of a plan to manage port operations around the United States and a Chinese firm gave up on a plan to acquire Unocal, an American oil company.
For Canadians, the newfound parity with the American currency has proved to be as much a source of anxiety as pride in a country with an export-dependent economy.
For decades, the Canadian dollar’s anemic state lent it little respect. Although the currency’s popular name, the loonie, comes from the bird depicted on the one-dollar coin, its alternate meaning was not lost on Canadians. In an episode of “The Simpsons” about the animated family’s trip to Toronto shortly after the Canadian currency’s collapse in 2002, Homer Simpson won over a recalcitrant security guard by waving a single American dollar bill in his face.
The Canadian dollar’s ascent is a result of the nation’s strong economy, experts say. Demand, much of it from Asia, has bolstered prices for exports like minerals, oil and wheat. The development of huge oil sands projects in Alberta has created a labor shortage throughout Western Canada.
Still, the rise in the country’s currency has hit the manufacturing sector. Douglas Porter, an economist with BMO Nesbitt Burns, a brokerage firm, estimates that 250,000 industrial jobs have already disappeared because of the rise of the Canadian currency.
As the chief economist of the Canadian Manufacturers and Exporters, a trade group, Jayson Myers, finds little professional joy in the Canadian dollar’s ascent. But he readily acknowledged that achieving parity would lift Canadians’ spirits.
“It makes a lot of people feel pretty good,” he said. “They can go on trips to the States again; they can go on trips to Europe. After 16 years of always seeing their currency in an inferior position, Canadians now have strong buying power.”
In Europe, there was at least one call for a Continentwide effort to reverse the course of the euro, which is used as the official currency in 13 countries. “Let’s say that it’s a change in level that concerns all of us Europeans, and it’s clearly a point we must address together among Europeans,” the French finance minister, Christine Lagarde, said during a trip to China, according to Reuters.
Evidence is starting to emerge that the euro’s strength is chipping away at sales. Ralf Wiechers, chief economist for VDMA, an association of German machine-tool makers whose performance has been the backbone of the country’s boom, said that the currency values are starting to hurt earnings despite continued gains in sales.
“The world economy is creating the volume,” Mr. Wiechers said. “The exchange rate is starting to decide what the profit margin is.”
In the American Midwest, manufacturers say they are seeing more business, in part, because the weaker dollar has made them more competitive on the world market.
Kendig Kneen, chief executive of Al-Jon Manufacturing in Ottumwa, Iowa, said his scrap recycling and waste management equipment business had been growing up to 30 percent annually and that he had expanded his payroll to 150 from 100 workers a year ago. He estimates that about half the growth is a result of the weaker dollar, with the rest coming from stronger global demand for scrap recycling.
“We are in a world market,” he said. “People have heard that phrase global economy for the last 10 to 15 years. It’s just now that they are starting to believe it.”