TIME.com: Wither The Dollar

Wither The Dollar
A weak dollar should be good for U.S. exports. But it's already causing pain overseas, and in the long run it could drive up the cost of living at home



The dollar's long slide — and widespread expectations that it will slip further — has officials on three continents fearing that their economies are stretched to the breaking point. They're assigning plenty of blame anywhere but their own backyard, and the accountability void only deepens worries of a dollar-induced global-domino recession.

Is the falling dollar really such a big deal? Since 2001, it is down 33% against the euro and 20% against the Japanese yen and has weakened against the pound and Canadian dollar as well. This broad slide has made goods produced in the U.S. more affordable to foreigners with stronger currencies. In the short run, foreign buying is a boon to U.S. factories that only now are emerging from their worst rut since the Great Depression. In fact, though U.S. officials say they want a strong dollar, the open secret in Washington is that they are in no rush to make it happen. For one thing, the steps the U.S. must take to shore up the buck are painful, probably involving some combination of tax hikes and budget cuts to rein in the U.S.'s massive borrowing needs. The federal budget deficit tops $400 billion, and tallying all forms of money flowing in and out of the nation, the country's total accounts deficit will come to about $665 billion this year, or a record 5.7% of GDP. President George W. Bush has said he wants to cut that deficit. Again, few believe he will take measurable steps until he has run out of options, because his plans for private Social Security accounts and making tax cuts permanent would require money the government doesn't have.

Besides, the weak dollar is a big factor in the revived manufacturing sector. After some lean years, exports are picking up, and factory profits are on a roll. In the third quarter alone, equipment maker Caterpillar attributed $102 million of sales largely to the benefits of a falling dollar. General Motors is opening new Cadillac dealerships in Europe. "The drop in the value of the dollar certainly helps," says James Taylor, Cadillac manager in Detroit. Other U.S. multinationals are reaping windfalls too, converting overseas revenues into the weak dollar and getting more of them.

TIME.com: Wither The Dollar -- Dec. 20, 2004