U.S. dollar makes comeback - East Valley Tribune: Business

U.S. dollar makes comeback

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Posted: Saturday, November 1, 2008 9:29 pm | Updated: 11:46 pm, Fri Oct 7, 2011.

NEW YORK - The stock market is in shambles, credit markets are squeezed and corporate earnings are cratering. But one piece of the mangled U.S. economy is making an improbable comeback: The once-almighty dollar.

As the financial meltdown clobbers world economies from South America to Asia, investors desperate for safe assets are plowing money into the battered buck — helping it snap a six-year slide and reclaim its long-held status as a stable asset during rough times.

CAPTION

“The dollar has become the safe-haven play,” said Kathy Lien, director of currency research at Global Forex Trading in New York. “It’s a pretty monumental move we’re seeing.”

Trouble is, a resurrected greenback may not be a good thing.

While a stronger dollar makes vacations overseas and commodities like oil cheaper for Americans, it also makes U.S. exports more expensive.

That could deepen the U.S. downturn by hurting companies from Boeing Co. to Caterpillar Inc. and Coca-Cola Co. that get an increasingly big chunk of their earnings from overseas.

Still, the dollar’s recovery is stunning for a currency that until recently was considered the dog among its main rivals. After reigning supreme as the world’s dominant reserve currency for decades, the dollar began a steep decline in 2002, buckling under the weight of costly wars in Iraq and Afghanistan and an economy with an $800 billion annual trade deficit.

Falling U.S. interest rates this year sped up the dollar’s decline until it took $1.60 to buy one euro at one point this summer. Shortly after the euro was introduced in January 2002, it took only 88 cents to buy one euro.

Now, suddenly, the buck looks safe by comparison. The economic pain spawned by the U.S. subprime mess has now crossed the Atlantic, roiling stock markets in Britain, France and Germany and punishing the euro and the pound.

The 15-nation euro this week fell to its lowest level against the dollar since April 2006 while the pound at one point last week lost a staggering 8 cents against the dollar — the biggest intraday move since exchange rates became freely floated in 1971.

The euro traded at $1.2852 in New York late Wednesday, while the British pound traded at $1.6314.

Meanwhile, once-booming emerging economies are also slowing, causing big hedge funds and individual investors to funnel vast sums of money out of countries like Brazil, India and China and into the relatively low-risk dollar.

The stampede into the greenback reflects a “crisis of confidence,” Lien said.

While the U.S. economy by no means is showing signs of a recovery, Lien said other countries are “just beginning to feel the magnitude of the global slowdown, whereas the U.S. is maybe three-quarters of the way through.”

“What everyone is beginning to realize is that, yes, the U.S. is in trouble. But it’s also much further along (in the crisis) and probably closer to stabilizing than Europe and other regions,” Lien said.

But the dollar hasn’t outperformed all major currencies.

The Japanese yen last week surged to a 13-year high against the dollar as economic fears led hedge funds and other investors to start unwinding so-called “carry trades” in which the yen is borrowed and then used to fund investments in other currencies with higher yields. As investors rushed to unload such investments, they were forced to buy back the yen, boosting its value.

The dollar traded lower against most major currencies Wednesday after the Federal Reserve lowered a key interest rate by half a percentage point, bringing the federal funds rate down to 1 percent. Lower interest rates can boost the economy but often undermine the dollar as investors look elsewhere for better returns.

Before the dollar’s surge, many investors earlier this year had all but abandoned it as the U.S. economy deepened its decline. That sent the dollar tumbling and pushed commodities such as crude oil, corn and soybeans to record prices as investors shifted money into hard assets as a hedge against inflation and weakness in the U.S. currency.

Meanwhile, foreigners flocked to the U.S. for cheap vacations and snapped up real estate at deep discounts. Manhattan boutiques displayed signs saying “We accept euros.”

But with the dollar seemingly on the mend, U.S. consumers will see some benefits. Since a stronger dollar generally pushes down the price of commodities, oil prices should fall further and help bring gasoline further below $3 a gallon.

Trips overseas won’t be as hard on the wallet either, while foreign-made goods from Korean flat-screen TVs, German cars, French wine and Swiss watches will also be more affordable.

Still, experts say the dollar’s new-found strength isn’t cause for celebration.

U.S. companies that sell lots of product abroad will suffer as their goods become more expensive, crippling the purchasing power of overseas buyers. And as the economic downturn ripples across the globe, demand for those same U.S. goods will fall as international customers cut back.

“This is a pretty scary situation for U.S. corporations,” said David Woo, global head of foreign exchange strategy for Barclays Capital in London.

“The most important reason the U.S. economy didn’t go into a recession before was because exports were cheaper and demand for U.S. goods went up,” Woo said.

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