Is a Weak Dollar a Good Thing?

So often I hear people in our industry say that the weak dollar is encouraging foreign investment in U.S. real estate. This is something that only makes sense in two ways: the first is if the foreign investor is purchasing a residential property for his or her own use and it is simply “cheap” to them because of the exchange rate. Think of the opportunity to buy a mansion on the water in the south of France for $10,000US. If this location is of interest to you, you might just buy that property because it is so cheap that you figure, why not?

The second reason a foreign investor might buy based upon the weak dollar is if they are looking for a currency arbitrage ie, they believe that the U.S. dollar will increase in value at a greater rate than their currency will increase.

Other than these reasons, the weak dollar is not a motivator. Consider this: if an investor purchases an income producing property because of a weak dollar, their gross revenue will be in that weak dollar, they will pay expenses in that weak dollar, they will collect net operating income and cash flow in that weak dollar and if they sell the asset, they receive the sale proceeds in that same weak dollar. That doesnt sound like great motivation to me.

Why is the dollar weakening as much as it has lately? Look no farther than the weak jobs numbers that come out month after month. With unemployment at 9.8% and climbing, it convinces markets that monetary policy will remain loose regardless of dollar weakness.

The dollar’s weakness also partly reflects fears that the economic recovery will take a lot longer than most economists anticipate. Besides being a deterrent to buying into America’s future, this sets up a classic deflationary mindset: Why buy now if the dollar may be even weaker in a few months?

You have to believe that the Obama administration wants the dollar to remain weak regardless of what they say publicly. The greenback has lost 11.9% of its value against a basket of currencies since the President took office. Treasury Secretary Geithner constantly says, “It’s very important to the United States that we continue to have a strong dollar…We’re going to do everything necessary to make sure we sustain confidence.” Unfortunately, the U.S. is willing to talk about a strong dollar but is unwilling to do anything about it.

With the amount of dollars that are being printed, it is no wonder that the dollar is increasingly perceived as the default mechanism for out-of-control government spending and, with this condition, its role as a reliable standard of value is destined to fade. Excess government spending leads to inflation, and inflation plays dollar savers for fools at home and abroad.

For now, the weak dollar helps our exports, by making them cheaper abroad, a welcome development at a moment of domestic economic weakness. Cheaper U.S. goods overseas could help achieve the long-sought rebalancing of the global economy in which the U.S. exports more, and others, including China, import more.

Public officials have been saying that the United States needs to become less dependent on domestic consumption which now makes up 70% of our GDP. Although politicians won’t say this means we need a weaker dollar, many economists take this as a given if rebalancing is to be achieved. This is one reason why all of the “strong dollar” talk coming out of Washington is not taken seriously.

One of the ways a country gets out from under its debt burden is to devalue its currency. On the surface a weak dollar may not look so bad to those on Wall Street. Gold, oil, the euro and equities are all rising as the dollar declines.

Some weak-dollar advocates believe that American workers will eventually become cheap enough, in foreign currency terms, to win manufacturing jobs back. In actuality, however, capital outflows overwhelm the trade flows, causing more job losses than cheap real wages create.

The unfortunate fact for the weak-dollar advocates is that no countries have ever devalued their way into prosperity.

If money is a moral contract between a government and its citizens, we are in a vulnerable position while the rest of the world simply wants to avoid having the wool pulled over their eyes. This is why China and Russia, the two largest holders of dollars, are advocating for a new kind of global currency for denominating reserve assets. It is also why OPEC is growing increasingly anxious about whether to continue pricing oil in depreciated dollars and why central banks around the world are turning their backs on dollars in favor of alternative currencies. This reduced global demand exacerbates the dollar’s decline.

If the President and Congress are serious about wanting a strong dollar, they need to show a genuine commitment to private-sector economic growth. The solution includes some key ingredients such as a strong U.S. jobs program, a flatter more competitive tax structure, significant reductions in future spending and common sense bank regulation so small business lending can restart.

In the short run, the weak dollar may bring international travelers to our cities and help our hotel industry but, if we are interested in real growth and long term prosperity, we need a stronger U.S. dollar.

6 Responses to “Is a Weak Dollar a Good Thing?”

  1. 1 hummbumm October 26, 2009 at 9:13 am

    The dollar vs. Euro is still well below the all time low in Mid 2008. This retracement is just walking back the impact of the crisis. In general terms the dollar has been weakening over the past 30 years. You are probably right regarding the mindset of investors in CRE, but other fears of the dollar are overblown. If China is concerned about the dollar, they need simply stop buying $ and let the Yuan appreciate. However, they refuse to do that and thus keep acquiring $. An alternate reserve currency is very hard to envision given the demographic and structural weaknesses of the Eurozone and Yen vs. the US.

  2. 2 Gordon Reese October 26, 2009 at 12:32 pm

    Bob, regarding your comments related to the deteriorating/weak
    economic conditions currently prevalent in the US that are
    driving down the dollar I was reminded of a statement made
    by Winston Churchill “while democracy is a bad system it is
    a lot better than all the other forms of gov’t that exist in
    the world”. Thus while current economic conditions are bad
    here in the US when I consider the prospects of say the rest
    of the G20 nations I don’t see any country I would rather
    trade places with when all things are considered. While the
    dollar is depreciationg somewhat it is comforting to know that
    if one hangs on to those dollars they will still be a viable
    currency far into the future…or as Will Rogers said “I am not
    so concerned about the return on my money as I am the return of
    my money”

  3. 3 Chris October 26, 2009 at 10:35 pm

    The key phrase in your article is that countries can’t devalue their way to prosperity. If China simply allowed their currency to float, we would be a long way toward the US becoming a little more production oriented and China becoming a little more consumer driven. Currently, the USD is being used in carry trades so it has been pushed down in relative value. But, as one of the other comments eluded to, the USD is a terrible currency, except for all the others. Most other nations are making the same fiscal and monetary policy mistakes. With deflation and continued deleveraging, one would expect a short term rise in the USD. But, I think the long term trend is clear: the USD will fall and that is bad because it means inflation which means weaker purchasing power and ultimately a lower standard of living for most Americans.

  4. 4 Carl Todd October 27, 2009 at 6:04 pm

    A long term week dollar only leads to inflation. As many of our raw materials and much of our fruit and most of our consumer goods are imported the reduced purchasing power of the dollar can only lead to inflation especially if our foreign suppliers and their other customers have strong currencies. Aladin was the only one selling old lamps for new expensive ones. There are no Gennie’s hidden in our cheap dollars for that can restore our productive base unless we do what China did – manipulate the currency till you become a major consumer goods exporter. Wake up America learn from world wide past experience when planning for the future. Quick cures without long term reinforcement plans only lead to further disaster.

  5. 5 forex robot November 17, 2009 at 7:25 am

    Great read, you can always learn something new from StreetWise. Keep up the good work!

  1. 1 Winning Commodity ETFs for a Falling U.S. Dollar | Top Equity News Trackback on January 16, 2010 at 2:12 pm

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