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Plunging dollar has ripple effect

Fri., Oct. 15, 2010

WASHINGTON – The dollar keeps falling around the world, tumbling against other major currencies because investors expect the Federal Reserve to pump more money into the economy next month to try to stimulate growth.

The effects can be seen almost everywhere.

Since late summer, when Chairman Ben Bernanke first hinted that the Fed was ready to act, anticipation of the move has rippled across the economy: Stock prices have surged. So have oil prices. Commodities like gold, silver and corn have risen. Treasury yields have slid. Mortgage rates have sunk, too, along with yields on money markets and CD accounts.

On Thursday, the dollar fell to a 15-year-low against the yen in Tokyo, after flirting with a post-World War II bottom. It also touched its lowest level against the euro since January. The dollar has slid more than 10 percent against the euro in the past three months.

What does it all mean?

For one, imports can cost more. So does travel abroad. Goods from U.S. companies become cheaper for foreigners, and oil tends to cost more. Even the likelihood of some new price bubble in investments such as stocks or real estate could rise.

When you total it all up, the U.S. economy is so weak right now that the Fed considers a cheaper dollar to be a good thing. That’s especially true when a low dollar is accompanied by super-low interest rates.

Those cheaper rates, on mortgages, corporate debt and other loans, could help rejuvenate the economy. Consumers and businesses are more likely to borrow and spend – at least those who can afford to or who qualify for credit. The idea is that higher spending would course through the economy, boosting corporate revenue, creating jobs and driving down unemployment.

The Fed is widely expected at its Nov. 2-3 meeting to launch a program to buy more government bonds. By doing so, the Fed would be injecting billions of dollars into the economy.

It’s the move that Bernanke signaled in a speech Aug. 27 at an annual Fed conference in Jackson Hole, Wyo.

Here’s what’s happened:

The Standard & Poor’s 500 stock index has soared 10.6 percent. The S&P 500 is a common investment for Americans’ 401(k) accounts, which means their retirement savings have enjoyed a healthy gain.

The price of a barrel of oil has risen 10 percent. And retail gasoline prices have increased 5 percent. Americans are now paying nearly $400 million a week more for gas. Oil is priced in dollars around the world. So when the dollar sinks, it becomes cheaper for those who hold yen or euros. Overseas buyers then buy more oil, pushing up its price.

Gold, silver, corn and other commodities have benefited, too, in part for similar reasons: They, too, are priced in dollars. So they’ve become more of a bargain for traders who buy them with foreign currencies. Gold has risen 11 percent since Bernanke’s speech – to $1,377.60. Silver has surged 28 percent.

The yield on the 10-year Treasury has sunk from 2.65 percent to 2.5 percent. Mortgage rates, which tend to track 10-year Treasury yields, have followed. This week, the average rate on a 30-year fixed mortgage fell to 4.19 percent, the lowest point since the 1950s.

What can the Fed do?

The biggest question is whether the Fed’s expected action next month will actually achieve its goal of stimulating spending and hiring.

Some skeptics warn that the Fed’s efforts to shrink interest rates now is destined to cause worrisome inflation months from now.

Eventually, the low dollar should help boost U.S. exports. Yet so far, there’s little evidence it has. The government said Thursday that the U.S. trade deficit shot up in August to the second-highest point of the past two years. The reason was that a surge in imports outweighed a small gain in exports.


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