These days, the weak dollar is being blamed for causing everything from the high price of oil to the shortage of the Nintendo Wii video gaming systems. According to a March 29 2008 story in The Dallas Morning News, Michael Pachter, an analyst for Wedbush Morgan said that Nintendo makes more of a profit on consoles sold in Europe than in the U.S. because when foreign companies sell their goods in the U.S. for dollars and then convert those dollars to their own currencies they get a smaller profit than if they sell their products in countries with stronger currencies.

With that in mind, Linda Rosencrance asked currency experts Marc Chandler, global head of foreign exchange at Brown Brothers Harriman, and David Resler, Managing Director and Chief Economist, Nomura Securities International Inc. to talk about the national and global effects of the battered dollar.

Why has the dollar fallen? Are there political reasons? Is there a weakness in the financial system?
RESLER: There are a myriad of reasons for the dollar’s weakness: the turmoil and problems in the U.S. credit markets are a big part of it. And problems in the U.S. credit market are part of it, as is the perception that the U.S. economy is slipping toward recession — all of which tend to undermine assessments about the U.S. as an attractive market to invest in so that tends to pull dollar lower.

Other people would argue that what the sub-prime problems point to is sort of like global overreach — our government is in debt, the military is overstretched, consumers are tapped out, people who ought not have bought homes, bought homes.

CHANDLER: There are two types of reasons: one is cyclical and one is structural. The cyclical reasons have to do with the Federal Reserve first getting done tightening before other central banks and now cutting interests rates much more aggressively than other central banks including the Bank of Canada and the Bank of England, which that have also begun to cut interest rates and the ECB, which is nowhere near close to cutting interest rates according to their officials.

For the structural reasons — people would cite that the central banks are diversifying reserves — I mean that the central banks have accumulated reserves through either intervention or through trade surpluses and are now moving some of those dollars into other currencies like the euro or the British pound. Other people would argue that what the sub-prime problems point to is sort of like global overreach — our government is in debt, the military is overstretched, consumers are tapped out, people who ought not have bought homes, bought homes. So they would say that the long-term decline of the dollar is feeding on itself.

Some countries like Iran and Venezuela have now demanded that countries pay them for their oil in forms other than U.S. dollars. People are worried that the Pax Americana is in decline and the dollar is emblematic of that.

I tend to side much more with the cyclical argument than the structural argument. I think that Wall Street oftentimes minimizes cyclical arguments and exaggerates structural problems. I think the dollar’s weakness in largely cyclical and I would say that a dollar is already in the process of bottoming out.

How have the currencies in other countries been doing?
RESLER: By definition, if the dollar is weaker the currencies of other countries are stronger. The euro in particular is at an all time high or close to it and the strength of the euro is an indication that investors are reasonably confident that the European Central Bank isn’t going to ease monetary policy anytime soon. So the prevailing interest rate differential between U.S. rates and European rates is going to continue. So that makes currency investors in other parts of the world where neither the euro or the dollar is the medium of exchange look to the euro as a relatively more attractive alternative, at least for now.

That may well change because a lot of this international sentiment against the dollar in favor of the euro is predicated on the belief that while the U.S. is slipping into recession or is operating at close to recession-like levels of activity right now that somehow the rest of the world will avert that fate and I think that’s a hope that’s not warranted.

There’s this notion circulating that because of the strength of Asia, China and India, that somehow the rest of the world has become decoupled from the U.S. We’re still the largest economy in the world.

There’s this notion circulating that because of the strength of Asia, China and India, that somehow the rest of the world has become decoupled from the U.S. We’re still the largest economy in the world; we still buy a substantial portion of the world’s output and if we’re buying less of it then those who sell to us are going to feel the pain. I would argue that one of the reasons that this economic business cycle hasn’t been worse than it might have been is because the pain is already being shared around the world. Because we’re importing less that’s actually helping the U.S. economy stay stronger.