U.S. dollar battles it out on the world market

Don’t be surprised if the next time you go to buy a French

bottle of wine or a new outfit at your local department store, the

price is much higher than it was three weeks ago.

The price increase is not because the liquor store suffered a

rise in property tax. It’s not because the local department store

suffered cutbacks and is making up for lost revenue.

The reason Americans are paying more for the goods and services

coming out of Europe is because the value of the U.S. dollar on

world currency markets is in a decline. This decline coupled with

the rapidly increasing value of the European Union’s currency – the

Euro – has left world banks scrambling to head off the looming

global economic backlash that will ensue as a result.

The value of the dollar has been declining for the past two

years bringing with it rising concerns among economies in Asia and

in the unified, 12-country European Union.

The banks in Europe and Asia want the value of the dollar to

stay high. The higher the dollar’s value on world markets the more

expensive U.S. exports are, including services. This has been the

world economic standard for many decades.

When the cost of American exports is inflated, countries in Asia

and Europe benefit because compared to the United States, their

exports and services are cheap and therefore highly sought on the

world market. But, when the value of the dollar drops, so too does

the cost of U.S.-made goods, which triggers higher outputs of

American exports. It also brings higher prices to imports coming

into the United States, especially from Asia and Europe.

The dollar’s value has been steadily falling while the value of

the Euro has been rapidly growing. This fluctuation in currency

rates is leading to rising concern among EU economic experts.

The European Union is concerned because Europe, especially

France and Germany, have relied heavily on exports to boost the

recovery of its economy. When the price of European exports goes

too high, foreign investors will take their production and

import-buying activity to other regions of the world. This will

leave the export-dependant European economy helpless and stranded,

halfway through its economic recovery.

On the other side of the Atlantic, the Bush Administration is

not exactly jumping at the opportunity to put stop-gap measures in

place to stop the decline of the weakening dollar. Just like the

rest of the world, the U.S. markets are still recovering from the

tech-heavy recession that occurred in 2000.

The weakening dollar has saved nearly 700,000 jobs in the past

two years, according to Global Insight, an economic forecasting

firm. Also, because the price of American exports has decreased,

numerous manufacturing jobs are in the process of being created in

the United States. During an election year, those numbers are

important, especially because many in Washington have been blurting

the phrase, “jobless recovery” when referring to the U.S. economic

recovery.

Today, America is enjoying an economic boost in job creation and

export sales while Europe and parts of Asia are scrambling to find

ways to maneuver the value of their currencies down, to keep jobs

up and exports cheap.

There are two problems with this scenario. First of all, Europe

wants the price of the dollar to be high on global markets so they

can take advantage of the jobs and cheap exporting created by the

cheapened price of the Euro. This is fine, but why should the

United States continue to see millions of manufacturing jobs be

outsourced and suffer the economic backlash of expensive exports,

just so the economies in Europe, mainly France and Germany, can

enjoy an export-heavy recovery?

The second problem with the weakened U.S. dollar, although good

for America’s economy in the short term, is that it can eventually

lead to major economic hardships in the long term. This is because

America has accumulated a $500 billion trade deficit. In other

words, America pays many of its expenses by borrowing money from

foreign investors. If the dollar declines too much, then the

foreign investors who pay for our extravagant spending will pull

their money out.

The Federal Reserve will have to raise interest rates to lure

them back. This, coupled with the increased cost of imports coming

into the United States from foreign markets will lead to something

the U.S. economy hasn’t seen in almost 20 years – inflation. This

is why the French wine and clothing from Germany is more expensive.

It’s not the property tax or budget shortfalls causing the price

hike; it’s the rising cost of European exports caused by the

weakening dollar and rising Euro.

At the G-7 meeting last week in Florida, some of the world’s

largest economic players called for reform to head off the grim

future economic outlook for Europe and the United States. The

leaders of the summit issued a statement warning China that it must

allow its currency to fluctuate on the world market.

Currently, China has its currency pegged to the U.S. dollar,

thus always guaranteeing its currency will be less valued than the

U.S. dollar. This in essence allows China to always have lower-cost

exports than the United States.

Isn’t it too bad that that this “money” game being played on the

world currency market boils down to one easy to understand

conclusion? Getting a nice bottle of French wine or repairs made on

your Volkswagen is going to be much more expensive now than it was.

Oh, well.

 

Jason is a senior majoring in journalism. He is the assistant

campus editor.