It's impossible to read a financial newspaper or magazine these days and not immediately jump to an article lampooning the dollar thanks to continued US deficit spending and the sorry state of the domestic economy (not to mention the economic farce that would be yet another stimulus -- or non-stimulus, depending on your perspective -- package paid for by more debt). But in all of this talk about the lasting decline of the dollar, there's some potential good news for US companies. And that is we might become a low-cost country of choice for global companies looking for a bargain in manufactured goods and exportable services (e.g., virtual goods). But how might we get to this point? First, a bit of background and evidence regarding the dollar's slide is in order.
According to one source I recently came across, the dollar's route is continuing to gain momentum to such a degree that "central banks flush with record reserves are increasingly snubbing US dollars in favor of euros and yen, further pressuring the greenback after its biggest two-quarter rout in almost two decades". Specifically, "Nations reporting currency breakdowns put 63 per cent of the new cash into euros and yen in April, May and June" which makes clear that "World leaders are acting on threats to dump the US dollar while the Obama administration shows a willingness to tolerate a weaker currency in an effort to boost exports and the economy as long as it doesn't drive away the nation's creditors." The upshot is that "The diversification signals that the currency won't rebound anytime soon after losing 10.3 per cent on a trade-weighted basis the past six months, the biggest drop since 1991."
In other words, the Obama administration appears to have learned a lesson or two from China, refusing to care about a weak currency because it could very well help exports to get the economy back on track (however, unlike China, we continue to borrow astronomical sums to finance our deficit spending and this will be untenable if no one wants to buy up our debt at the rates we've enjoyed in the past). But what will a weak dollar mean for exports? Quite a lot, potentially. In fact, what largely kept us out of recession for so long, despite the financial services sector and consumer spending collapse, were strong exports throughout much of 2007 and part of 2008. So the irony of the current recession and what has largely -- at least in my view -- been a failed stimulus package is that the resulting flight from the dollar could very well help us get back on our own economic two feet.
Stay tuned for Part 2 of this post when we discuss how com panies might want to consider conservatively gearing-up from a Spend Management perspective for rising export demand despite the overall economic situation.