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The sinking dollar

Amy Scott May 2, 2006

KAI RYSSDAL: You have to feel a little bit bad for Ben Bernanke. The Fed Chairman said yesterday he is not soft on inflation, contrary to what some reports had hinted. But Wall Street paid him no heed. All three major indices were up today. No fear of rising interest rates there. And foreign exchange markets blew him off completely. The dollar fell near one-year lows against both the Euro and the Yen. Even the Canadian dollar hit a 29-year high against the greenback. That’s great news for American companies selling abroad. Their stuff is cheaper now. But it’s perhaps not such a boon for the rest of us. Marketplace’s Amy Scott explains some of the reasons for the weakening buck.


AMY SCOTT: One big reason is the trade deficit. Americans buy a lot more stuff from other countries than we sell overseas. The imbalance hit a record $800 billion last year. Foreign companies and governments give a lot of that money back, by investing in the US. And that keeps the dollar strong. But John Williamson with the Institute for International Economics says those investors are starting to head for the exits.

JOHN WILLIAMSON: People worry when they see countries build up bigger and bigger foreign debts. And they feel this can’t go on forever, and therefore we’d better get out while the going is relatively good.

And the US hasn’t exactly welcomed foreigners lately. Think Chinese oil company CNOOC and Dubai Ports World. Currency fund manager Axel Merk is worried about increasing protectionism.

AXEL MERK: If we alienate other countries, then they might as well do business elsewhere.

And where are they going? The Euro and the Yen have absorbed a lot of fleeing currency investors. Today, the Canadian dollar traded above 90 US cents — its highest level since 1977. Currency strategist Jeffrey Gladstein says some countries like Canada simply look more attractive to investors right now.

JEFFREY GLADSTEIN: It’s a country that’s in very good economic shape. They’ve got low inflation for the first time in many, many, many business cycles. It’s got a lot going for it right now.

American manufacturers like a falling dollar. Cheaper goods mean they can sell more abroad. But US tourists will pay a lot more for that weekend in Paris or even Montreal. And at home, a weaker dollar can lead to inflation.

In New York, I’m Amy Scott for Marketplace.

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