March 29, 2024
Editorial

Driving the Dollar Down

The United States’ financial challenges – rapidly growing national debt, an expanded trade deficit and a prolonged and costly war – are taking a toll on the dollar. It has plunged in value compared with other national currencies. The one bright spot, however, is that the favorable exchange rate may draw more Canadian shoppers to Maine.

On Friday, the Canadian dollar reached its highest level since 1992, trading at 83.54 U.S. cents. The Canadian dollar has risen 10 percent in the past three months, the strongest showing of any of the 16 major currencies. A major reason was the unexpected strong growth in jobs last month. According to Statistics Canada, 34,300 jobs were added to the country’ economy in October, more than the 29,000 economists expected. The country’s central bank had also raised interest rates to boost its dollar.

The Canadian dollar had its biggest gain in three months on Nov. 3, when it rose 1.4 percent as traders sold off their U.S. dollars on the news that President Bush had been re-elected. Confirmation of the president’s second term has also boosted other international currencies. Late last week, the dollar fell to nearly $1.30 against the euro, the weakest it has been against the European currency since it debuted in 1999. At that time, the exchange rate was one-for-one.

There are several reasons for the dollar’s drop. One is the mounting U.S. deficit. As the size of the federal debt grows, more and more dollars must go toward interest payments. According to the Congressional Budget Office, $160 billion was devoted to interest payments in 2004. That will rise to $178 billion in 2005 and to $255 billion in 2007.

Federal spending is also constrained by the war in Iraq, for which the Bush administration is expected early next year to ask for an additional $75 billion. This spending worsens the deficit.

It also takes money away from the stock and bond markets. Instead, money – both foreign and domestic – is being used to finance the deficit in the form of U.S. Treasury securities. The amount of such securities held by foreign entities has risen sharply in recent years. Foreigners now own 43 percent of the country’s privately held national debt, up from 30 percent in 2001. The problem comes when these entities, mainly foreign central banks, pull out their money to bolster their own currencies or to buy ones that are performing better than the dollar.

In addition to opportunities for exporters, a bright spot for border states such as Maine is that Canadian shoppers, who dwindled in number when the U.S. dollar was trading at more than $1.30 Canadian, may start heading south. Marden’s in Brewer has seen a small increase in Canadian customers and expects more as their dollar is worth more. Other stores are experiencing similar early signs.

With the gloom of financial experts concluding the dollar’s decline is a harbinger of rising interest rates and inflation, having a few more shoppers around takes some of the sting out of the forecasts.


Have feedback? Want to know more? Send us ideas for follow-up stories.

comments for this post are closed

You may also like