If you’ve been postponing a trip to Europe or Britain in the hope that the dollar will recover, you would do better to book yourself into a nice hotel in Miami, Vegas or some other great American destination.
And forget about India, as its tourist sites will no longer accept dollars as payment for admission. The Indians want a hard currency, their very own rupee.
The dollar is not going to recover any time soon. Indeed, something like $2.10 to buy a British pound and $1.47 for a euro might seem a bargain in a few months.
Start with the Federal Reserve Board’s monetary policy committee. Chairman Ben Bernanke and his colleagues are worried that the deteriorating housing market will turn a slowdown into a recession.
Interest rates on about 2 million subprime mortgages are due to jump next year from the 7 to 8 percent range to 9.5 to 11 percent, raising the monthly payment of the typical subprime borrower by about $350.
Many just won’t be able to come up with the money, and their houses will be added to the already-large inventory of unsold homes. Others will have to cut back on purchases of consumer goods, especially if gasoline stays around $3 per gallon.
Even homeowners with fixed-rate mortgages are expected to be hurt, as they can no longer count on borrowing against rising equity in their homes: The days of ever-rising house prices are over, at least for now.
The Fed also has to worry about the ongoing problems of the financial markets. As banks write off billions of dollars, with unknown billions more to come, their willingness and ability to lend even to creditworthy businesses and individuals shrinks. That will add to the drag on the economy and increase the pressure on the Fed to cut interest rates.
Lower interest rates, especially if combined with an economic slowdown, cut the return foreigners can expect on dollar investments. They will want to buy fewer dollars while our trade deficit is forcing us to pump more greenbacks into the world economy. Increased supply hitting lower demand from such as China and the Middle East oil producers, and a further fall in the dollar are almost assured.
Not all of this is bad news for the American economy. The falling dollar has stimulated exports sufficiently to offset some of the downward pull of the housing market.
Americans are staying at home, Europeans are flooding into American cities to do their Christmas shopping, and buyers of business equipment are finding that U.S. suppliers can offer more favorable prices than their German and French competitors.
Which has the Europeans leaning toward protectionism. With the Chinese currency more or less pegged to the dollar, Chinese exports are not disadvantaged by the dollar’s weakness. That puts the brunt of the adjustment to America’s weakening currency onto Europe, as the strong euro sucks in imports and makes exports less competitive. So the EU is now threatening to slap tariffs on “subsidized” exports from China.
Protectionist sentiment is also rising in America. Candidates for the Democratic presidential nomination are threatening to eschew new trade deals and to impose retaliatory, offsetting tariffs on Chinese goods if the regime continues to cling to its dollar peg.
And both political parties are so nervous that the accumulated capital of the so-called sovereign wealth funds, many run by hostile governments, will be used to “buy up America” that they might prevent those funds from buying dollars with which to invest here.
Despite all of this, a dollar rout remains unlikely. For one thing, it is not at all clear that the U.S. economy is tipping into recession. We will know more after the Christmas shopping season.
Benchmark retailer Wal-Mart is predicting a “solid” holiday season, and the National Retail Federation is predicting sales will be 4 percent up over last year. That’s won’t elicit wild cheering from shopkeepers, who are already cutting prices, but it would hardly be a calamity for the economy.
More important, there are signs that the housing market’s problems have finally caught the attention of the Bush administration.
Some officials are proposing a moratorium on interest-rate re-sets until a case-by-case review enables lenders to identify borrowers who, with a little bit of flexibility on lenders’ part, can avoid foreclosure. Others want to extend the activities of government agencies involved in the housing market. Cataclysm might not, after all, be just around the corner.
And the Fed just might notice that Blackstone and other investors have begun to shop for undervalued subprime investments, signaling that the worst might be over. That would embolden it to keep rates where they are, forcing the dollar bears to settle for a continued but gradual decline in the U.S. currency, rather than a rout.
Examiner columnist Irwin Stelzer is a senior fellow and director of The Hudson’s Institute’s Center for Economic Policy.
