The US dollar is taking a beating. It’s been on a steady decline for two years, and was recently surpassed by the Canadian “loony”. It’s at record lows against the Euro. Even the Mexican peso is at a seven year high against the dollar.
On the day I moved to Denmark, it took 6.28 Danish crowns to buy a dollar. Today it’s today 5.10 — almost a 20% difference. Given this, some of the prices I talked about earlier here have changed, especially compared to February 2006, when I got here.
For example, a Big Mac meal is now $9.21 in Copenhagen (it was $7.48). A large glass of beer runs about $9.80 in the popular parts of town (it was $7.96), and is $7.45 at my favorite cafe (it was $6.05). And gas is $7.43 a gallon here now (it was under $5.43, but part of that increase is just higher gas prices).
I get paid in Danish currency, so prices have stayed the same for me. But it’s a bad time for Americans to travel. On the other hand, it’s a great time for people living elsewhere to visit the US. When I go home for Christmas, it’ll be like everything is 20% off, and that’s on top of the fact that pretty much everything in the US is drastically cheaper anyway. (Strangely, this will have no effect on my Christmas gift purchases whatsoever — it’s so strange how economics work.)
Other than travel, and the cost of imported goods, it doesn’t seem like the exchange rate makes a big difference, but if this trend continues, it could be a disaster. The dollar has been one of the world’s most solid and reliable forms of currency for a long time. Many countries buy dollars and extend loans to our government for exactly this reason. (This is, after all, how we’re paying for the Iraq war).
But at some point those countries could lose faith and decide that they are tired of owning a losing currency. They’d start selling their dollars, and its value would most likely plunge. It would be a disaster. It would be very hard on the global economy, but it would be especially hard in the US.
Don’t be surprised that we’re in agreement about something–maybe I’m just in an unusually conciliatory mood–but at least in the long term, a weak dollar is not a good thing. It also sucks when we Americans travel. Plus there’s that embarassment factor being worth less than a Loony.
Why do we have a weak dollar? The Federal Reserve is printing too much money in order to hold interest rates down. I don’t think that’s good thing, particularly in that it’s brought on predatory mortgage lending practices, which has given the mortgage industry a big hangover.
But in the big picture, a weak dollar isn’t necessarily bad either. We have a very strong underlying economy. We’ve experienced high growth rates in the past several years, in the 3% to 4% range. The economy also created 8 million jobs in the past four years–at McDonald’s alone! The stock market is up, and incomes have risen faster than inflation, at 4%.
Now this idea that China, Japan, and OPEC will suddenly decide to switch to the Euro or not buy US bonds or goods in dollars anymore–it’s unlikely. Bankers and currency traders can hedge in any currency they want. In other words, they can already get out of USD anytime they want. So why hasn’t it happened yet? Because Asia and OPEC are investing in the stability and strength of the US economy. Having said that, I wish the Fed would support a stronger dollar. I refuse to pay 9 bucks for Labatt’s.
So stop worrying and buy yourself a couple pints of Danish beer with those valuable Kroner swinging around in your pants.