Falling Behind

The dollar's running weaker against other currencies. Will your business feel the pinch?
Magazine Contributor
4 min read

This story appears in the August 2003 issue of Entrepreneur. Subscribe »

The impeachment of the president. Election controversy. Terrorism. Recession. War. Over the past five years, U.S. businesses have faced an enormous range of potential economically destabilizing factors. But through it all, they could always count on one constant: the , which generally remained extremely strong compared to other world currencies.

No longer. Over the past six months, the dollar has plummeted, reaching its lowest level in four years against the euro. To some extent, the dollar's fall has been a reflection of the sluggish American . Yet the dollar's decline is a result not only of economic weakness, but also of the White House abandonment of the Clinton administration's strong-dollar policy. Former Clinton Treasury Secretary Robert Rubin constantly emphasized that a strong dollar was in 's interest. By noting that he supports "minimal intervention" in the price of the , the current treasury secretary, John Snow, has signaled that the Bush administration would not mind a weaker dollar.

The Bush administration may believe a dollar decline will goose the U.S. economy. A significantly weaker dollar is helping some . Some exporters benefit because U.S. goods are now cheaper overseas, and sales made in Europe or Japan are more valuable when converted back into dollars, says Jim Morrison, president of the Exporters Association. Morrison notes that "some of the biggest winners will be small companies in industries where American companies are already relatively competitive internationally and only need that little added benefit of a cheaper dollar." Electronics companies, for example, many of which sell more than half their goods outside the United States, derive benefits from a weak dollar. What's more, if a weaker dollar helps prevent deflation, which some see as a looming threat, it will benefit entrepreneurs, since deflation-a situation in which consumers tend to save because their money will be worth more tomorrow-would be disastrous for small retailers.

Overall, however, a weaker dollar is more likely to hurt small companies. Indeed, says Christian Weller, an international economist at the Economic Policy Institute, a Washington, DC, think tank, the majority of American exports come from large firms. "Big companies like Boeing will be helped more by the weaker dollar, since they do most of the exporting, and big companies can easily move some of their operations abroad if they have to [in order to deal with any currency fluctuation]," Weller says.

Meanwhile, Edward Hudgins, director of the Objectivist Center think tank in Washington, DC, notes that not only are most exporters large firms, but there are more small importers than exporters. Small companies such as tool-and-die manufacturers increasingly source raw materials abroad, and these companies will wind up paying more for importing these goods.

Other economists worry that a decline in the dollar could lead , who are already concerned about the American economy, to pull investments out of the United States-a situation that could slash growth rates, since the U.S. economy is dependent on foreign capital. To some extent, this is already occurring: Investors have begun pouring money into the euro.

What's more, a weaker dollar has not helped U.S. entrepreneurs battle their key foreign competitor: China. "The dollar has fallen against the euro and the yen, but it hasn't fallen compared to China's currency, which is held up with a peg to the dollar," says Weller.

According to the Financial Times, Department of Treasury data released recently showed a $20 billion rise in bond holdings by overseas investors, suggesting that foreign countries such as China are buying dollars to prevent their currencies from stagnating. As a result of China propping up its currency, Chinese companies are not undercut by currency fluctuations, and they still benefit from extraordinarily low labor costs.

Despite the possibility that a weaker dollar might not actually help business, entrepreneurs should prepare to deal with a greenback decline. Says Weller, "The dollar could still fall a considerable way."

Joshua Kurlantzick is a Washington, DC-based writer.


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