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FOREIGN EXCHANGE

Who needs a weak dollar?

It’s been interesting to watch recent gyrations in the market from the sidelines. First the dollar tentatively reversed its long-term downtrend, then resumed it again, before reversing yet again and heading off in the other direction.

Being a simple soul, I’ve always wondered what the benefit of a weak dollar is supposed to be. History has shown that a weak dollar will not address the US trade imbalance – taking $/JPY down from 263.00 in early 1985 to below 80.00 a decade later made no difference. Economists will argue about things like the J-curve effect, but as that 10-year experiment showed, the US doesn’t really make anything worth exporting apart from weapons and guitars (now often better made under license in Mexico, China and Korea). In other words, the US would do better for itself making imports cheaper with a strong dollar. A similar argument applies to the UK unfortunately, but with the economy here looking absolutely wrecked, it’s difficult to see what can strengthen sterling.

The EU, on the other hand, still manufactures and exports goods. Obviously oil is an issue. But while headlines scream about high prices, the pressure is not quite so severe on the EU as it is on the US because of the strength of the euro. As for producers, they generally get paid in dollars, so they have little interest in pumping more oil while the dollar is weak.

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