US basks in dollar decline

Analysis By Stephen Evans BBC North America Business Correspondent

The dollar has reached record lows against many currencies in recent weeks. But there seems to be little sense of concern within the US.

You bump into the living pieces of evidence of the weak dollar every day in New York's Times Square - literally bump into them.

The place is packed with Europeans hunting for bargains: the jeans at half the price they might cost back in London; or the digital cameras, at perhaps a third less than they might cost on the other side of the Atlantic.

And no doubt the tourists take their bargain purchases back to their bargain hotel rooms.

The devaluation of the dollar over the past year (plus fear of flying) has cut the price of accommodation in New York by about a third.

The flip side of the coin is higher prices in Europe.

A well-heeled - and fearless-of-flying - American might have spent $1,500 on a weekend at the fanciest hotels in London a year ago. Now, the luxury will cost an extra $175.

Boost for business

But the beneficiaries of the weak dollar are not confined to the tourist bits of Manhattan.

The dollar at an eleven-year low against the pound, an all-time low against the euro and a three-year low against the yen, is an obvious boon not just for tourists but also for great swathes of American business.

euro/dollar exchange rate The ups and downs of the euro against the dollar and 23 other currencies

Companies like Dow Chemicals, which earns half its money from exports, are basking in the greenback's weakness.

Coca Cola and all the other domestic producers of packaged foods and consumer goods with big foreign export markets are also relishing the current situation.

And one wouldn't be surprised if there was some quiet satisfaction in the White House either.

There never was a politician who wasn't publicly in favour of the national currency being "strong". It is, after all, a virility symbol.

But an exchange rate is just a ratio, not a true indication of national potency.

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Politics of the dollar

Nobody in the White House has actually appeared on a balcony and cheered for the weak dollar yet, but there may be some feeling that its effect on the American economy in an election year will be welcome.

And if there might be some pleasure in Washington, so there is unease in the big business capitals around the world.

In Europe, exporters are hurting.

Volkswagen, for example, exports a quarter of a million cars to the United States, and the current exchange rate makes its plans to manufacture more cars in Mexico seem much more attractive.

Such is the concern in Japan that the government has spent 20 trillion yen ($187 billion) intervening on the foreign exchange markets, trying to mitigate the dollar's relentless fall.

No limits?

So, how long will the fall continue?

With the Federal Reserve indicating that interest rates are not going to rise in the near future, there's little reason to think that the dollar's slide will turn around any time soon.

The fundamental cause of the weakness is America's large trade deficit with the rest of the world.

Until that starts shrinking, the demand for dollars will remain weak and the demand for foreign currencies to buy foreign goods will remain strong - whatever politicians in the world's capitals might prefer.