Is the era of the strong dollar gone for good–and is that all bad? Amid concerns about terrorist attacks, a sickly stock market, corporate shenanigans and a less-than-convincing economic recovery, the U.S. currency has given up a lot of ground in recent months and is expected to go lower still. But economists say that as long as the dollar doesn’t go into a tailspin, its weakness should help more U.S. corporations than it hurts.
The dollar is approaching parity with the euro after having fallen about 10% against the EU currency in the first six months of this year. (See chart.) Against the Japanese yen it’s down about 9%. Yet even after those declines, economists say the dollar remains overvalued after its strong run in the late 1990s, and most expect it to weaken further in the coming months. A weaker dollar in theory will boost U.S. inflation, but economists doubt the Federal Reserve will let inflationary pressures get out of hand. They say the real downside could come if the dollar’s decline goes too far, too fast. The rest of the world has been trying to “hitch a ride” on the U.S. economic recovery, says Chris Probyn, chief international economist at State Street Bank & Trust. “If the dollar were to crash land, that would certainly pose a problem for the global recovery.”
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