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What the falling dollar means

News that the Canadian dollar reached equal value with the U.S. dollar last week has Canadians “brimming with national pride,” said Douglas Belkin and Joanna Slater in The Wall Street Journal. The last time the two currencies were worth the same amount was back in 1976. Indeed, for decades, the loonie—so named for the engraving of the loon that adorns the Canadian dollar coin—has been “the butt of bad jokes from their neighbor to the south.” Now it’s the Canadians’ turn to gloat. Canadian Robert Katzman, owner of five strip clubs in Detroit and in nearby Windsor, Ontario, notes that “American dancers are heading to Canada to earn the strengthened Canadian currency,” while his Canadian patrons are going the opposite direction, because their loonies go further in the U.S. “We’re feeling for the first time like we’ve caught up with our big brother,” he said. Vice merchants aren’t the only Canadians celebrating. The Toronto Blue Jays baseball team saves $600,000 on its player payroll every time the loonie gains a penny against the U.S. dollar. And Canadian parents with children in U.S. colleges welcome the loonie’s increased purchasing power, which translates into a hefty cut in their tuition bills.

In the U.S., “the dollar’s weakness has not been a big deal,” said Morgan Stanley economist Stephen S. Roach in The New York Times. “That may be about to change.” Currency values are “first and foremost” a referendum on “the intrinsic value of one economy versus another.” Thus, the dollar’s plunge reflects the woeful condition of the U.S. economy, now threatening to topple into recession. A weaker dollar makes recession more likely, in fact, by rendering imports “considerably more expensive—the functional equivalent of a tax hike on consumers.” It could also make foreign investors skittish about buying dollar-denominated assets—a real problem for an economy so dependent on foreign capital.

That’s true as far as it goes, said David J. Lynch in USA Today. But there’s also an upside. “The weaker dollar is a boon for U.S. exporters whose goods are now less expensive for foreign customers.” Strong foreign sales by big exporters such as Boeing and Caterpillar added 1.4 percent to U.S. growth in the second quarter of 2007, and that contribution will likely grow if the dollar’s fall continues. “The growth we’re getting from trade,” said Moody’s economist Mark Zandi, “is helping to cushion the blow to the economy from housing.”

That will be little consolation if a sagging dollar pushes up U.S. prices—and sparks inflation, said the Financial Times in an editorial. “If foreign investors anticipate inflation and start to dump some of their $12 trillion in U.S. debt,” the dollar’s gradual decline could turn into a “rout” and plunge the U.S. into recession. “A dollar slump is only one of a number of possible scenarios.” But it’s plausible enough, and the consequences severe enough, for the Fed to tread very carefully through the current crisis.

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