Exchange rates: Americans just don't get it
By Edward Lotterman
Americans still do not understand the effects of exchange rate fluctuation on the economy. At least that is the lesson one might take from examining how recent strengthening of the U.S. dollar is reported in the media. This is another way of saying that the euro has weakened compared with the dollar.
That is how the facts usually are presented: The euro is weakening. It is treated as a purely European phenomenon that affects only residents of the 11 European Union countries that adopted a common currency, in January 1999. Some stories note correctly that the weakening euro is good for European manufacturers since their exports are cheaper then in international markets.
| The Great Communicator, who majored in economics in college, boasted in the '80s that the dollar once again was a strong currency. All the while, this strong dollar was putting millions of farmers through the worst financial wringer in 50 years and erasing more than 300,000 jobs each from U.S. auto and steel manufacturing. |
A few reports note that prices of Europe's imports are up and that this hurts consumers. But most stories dismiss this by commenting that imports make up only a small part of the average EU household's purchases.
Strength of the dollar
Many stories carry at least a race of smug condescension, as if saying, "Look at those poor Europeans with their 97-pound-weakling currency."
That is the attitude that Ronald Reagan displayed in the mid-1980s, when huge U.S. deficits, combined with tight monetary policies, pushed the dollar to stratospheric levels.
The Great Communicator, who had majored in economics in college, boasted that the dollar once again was a strong currency. All the while, this strong dollar was putting millions of farmers through the worst financial wringer in 50 years and erasing more than 300,000 jobs each from U.S. automobile and steel manufacturing.
Perhaps no one examines the effects of a weaker euro on the U.S. economy because it seems to be doing so well now. Employment and income are high, real estate markets strong, building active and equity markets resiliently bullish. Who cares about the negative effects of a strong currency when everything else is so good? After all, isn't the weak euro just an indicator that the world has much more confidence in the U.S. economy that Europe's?
That assessment is correct when one looks at the U.S. economy as a whole, but some sectors are in fact getting pounded by the strong dollar.
International trade
Take agriculture. President Clinton has made much of the potential benefits for U.S. farmers if legislation approving China's entry into the World Trade Organizations passes in Congress. But we still export eight to 10 times as much to the EU as we do to China.
China has agreed to lower its tariffs on agricultural imports if admitted to the WTO. This will benefit U.S. farmers, though much more in the long run than immediately. It assuredly will not be the panacea for financially strapped farmers as some proponents suggest.
In the meanwhile, however, the prices of U.S. exports to a much bigger customer — Europe — have gone up by a higher factor than Chinese tariffs may be reduced. Why? Because even though the prices of soybeans, wheat and corn have not changed much in U.S. dollar terms, a stronger dollar (or weaker euro, if you prefer that) means higher effective prices to European consumers.
A simple explanation may be helpful. The euro entered life on January 4, 1999, the first business day of last year. On that date, farmers in the Midwestern United States were getting about $5.46 per bushel of soybeans, according to USDA statistics. On May 12, 2000, the price was $5.41. In other words, soybean prices in U.S. dollars were about the same as they were 16 months earlier.
But look at the price in euros. The euro debuted at a worth of 1.187 U.S. dollars but soon began to slide. By May 12, 2000, it was worth only 91 cents. The bushel of soybeans worth $5.46 on Jan. 4, 1999, translated to 4.60 euros. By May 12, 2000, though, the nearly identical U.S. price of $5.41 now translated to 5.49 euros.
In other words, the price of U.S. soybeans to European customers went up nearly 30 percent in Europe while it was declining slightly for U.S. farmers. That is a big hike for customers who still buy one-seventh of all U.S. farm exports.
Exchange rates
We need to understand that exchange rates are merely symptoms of more fundamental forces in economies. There is nothing that the U.S. government practically can do to halt the dollar's rise against the euro.
But the media, citizens and policy-makers alike should at least understand what is happening in the economy and how it affects as important a sector as agriculture.
Mr. Lotterman is an economist and writer who lives in St. Paul. This article originally appeared in AGWEEK and is reprinted here by permission.
