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Dollar Sinks the Lowest Since It Started to Float

By FLOYD NORRIS

Published: September 22, 2007


A DOLLAR bill won’t buy what it used
to. The greenback is worth less than ever before in this age of
flexible exchange rates, and it has declined faster during the Bush
administration than in any president’s term since Richard M. Nixon severed the dollar’s ties to gold in 1971. Skip to next paragraph


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This week, the euro traded
above $1.40 for the first time, and the Canadian dollar climbed back to
parity with the American dollar for the first time in 30 years.The
chart shows the performance of the trade-weighted dollar index, as
maintained by the Federal Reserve. Measured against a basket of
currencies that has occasionally been updated by the Fed, the dollar is
now almost 40 percent below its level in early 1971. It has been a bumpy ride. The dollar suffered badly in the 1970s, particularly during Jimmy Carter’s
administration, when inflation seemed to be getting out of control. But
it then soared in the early 1980s, in response to higher interest
rates. It sank again as rates fell, but recovered during the economic
strength of the late 1990s. Now the index has fallen below the lows set
in 1995. The chart also shows the index’s compound annual change in each president’s administration.Not
all the moves can be explained by the dollar’s strength or weakness, of
course. The relative attractiveness of other currencies has varied.
Under President Bush, the dollar has almost held its own against the
yen, as the Japanese government has feared a strong yen could damage
the country’s exports.Still, during the Bush administration, the
dollar has fallen against each of the five currencies shown — the euro,
the yen, the British pound, the Australian dollar and the Canadian
dollar. It also is down against the two currencies in the index — the
Swiss franc and the Swedish krona — that are not shown. Over
all, the dollar index has fallen at a rate of 4.8 percent a year in
this administration, considerably more than the previous record of 2.7
percent a year, during the Carter administration. Mr. Bush is the first
president not to show a gain against any of the currencies in this
index. One important currency — the Chinese yuan — is excluded
because the index tracks only freely traded currencies. The Chinese
government has allowed its currency to advance slowly against the
dollar, but not by as much as the Bush administration wants, and the
American trade deficit with China has soared.Early in the Bush
administration, officials maintained they were following a
strong-dollar policy. Of late, that is not a phrase heard very often.

Europe Fears a Downside in Strong Currency

By MARK LANDLER

Published: September 22, 2007

FRANKFURT, Sept. 21 — Fears of an
abrupt economic slowdown in Europe deepened on Friday, after the
release of weaker-than-expected data and another record in the euro’s
relentless rise against the dollar. Europe’s stampeding currency prompted a warning from the plane maker Airbus that it might have to cut costs more deeply than expected to restore its troubled operations to financial health.“If
the euro remained durably at $1.45, that would mean we have to find 1
billion euros in additional savings,” Fabrice Brégier, the chief
operating officer, said in an interview with a French radio station.
The euro briefly traded at $1.41 on Friday morning before falling back
slightly. It was at $1.4091 in late trading in New York. Airbus,
which is controlled by France and Germany, is already in the midst of a
radical cost-cutting campaign, forced by heavy losses on its A380 jet.
Its voice is the latest in a chorus of complaints from French and
Italian leaders that the strong euro could choke off Europe’s growth.What
concerns economists more, however, is a sharp drop registered in the
monthly survey of purchasing managers’ activity — evidence that the
credit crisis that began in the American mortgage market and infected
British and German banks has now seeped into Europe’s underlying
economy.An index of purchasing managers in the service sector
dropped four points in September, its largest monthly decline ever,
suggesting that commerce here is slowing faster than economists
predicted.“It’s a bad surprise,” said Thomas Mayer, chief European economist at Deutsche Bank. “All this talk of Europe not being really affected by the problems in the U.S. may have been whistling in the wind.”It is far too soon to speak of a recession in Europe, Mr. Mayer said. The European Central Bank
has put off an increase in interest rates, possibly for the foreseeable
future, and injected cash into the banking system to prevent the credit
squeeze from mutating into a broader financial crisis.Still, the
speed with which the turmoil in the financial markets has registered in
the purchasing data alarmed economists. Most are busy scaling back
their predictions for growth in Europe next year.“It certainly got me nervous,” said Erik F. Nielsen, the chief European economist at Goldman Sachs, who had already lowered his forecast for European growth in 2008 to 2 percent from 2.3 percent.The
record-breaking rise of the euro has injected another unpredictable
factor into their calculations. Most European exporters have weathered
the rally without complaint, having cut costs and hedged their
exposure, either financially or by moving production to countries that
do not use the euro.But a noisy minority is starting to agitate,
and political leaders, notably in France, have picked up their
concerns, lobbying the European Central Bank to take steps to stem the
euro’s appreciation.“We hope the E.C.B., at its meeting in
October, will examine the consequences and take appropriate action,”
the French finance minister, Christine Lagarde, said during a visit to
China on Friday.The European Central Bank rejects such demands
as political meddling, and it has responded in increasingly testy
fashion to statements made by President Nicolas Sarkozy and his ministers. In
a speech in Paris on Friday, one of the bank’s executive board members,
Lorenzo Bini Smaghi, said, “In no other country do the political
authorities make frequent and uncoordinated public statements about the
exchange rate.” It hurts the credibility of Europe’s monetary policy,
he said.Economists say the level of noise in each country is roughly proportional to its exchange-rate vulnerability.German
officials, for example, have said relatively little about the recent
rally. “There’s no doubt that by any measure, the Germans are in much
better position than the French,” Mr. Nielsen said. “On unit labor
costs, Italy has also done a better job than France.”Still, a
top Italian industrialist, Luca Cordero di Montezemolo, said, “The
super euro worries us; we don’t want to give anyone any lessons, but
this could become a problem for exports.”Airbus is particularly
vulnerable because it earns all its revenue in dollars and incurs about
half of its operating costs in euros. That puts it at a big
disadvantage to its American rival, Boeing.Under
its existing plan, Airbus plans to cut 2 billion euros ($2.8 billion) a
year in costs by 2010, through the sale of several factories and the
elimination of 10,000 jobs. In his radio interview, Mr. Brégier said
the cost-cutting plan was predicated on a euro exchange rate of $1.35.Airbus
has hedged enough of its dollar exposure that a major short-term impact
is unlikely, Rainer Ohler, the head of communications, said.“Our problem is what’s going to happen in 2009 and 2010,” he said. “But nobody can predict what the dollar is going to do.”