Another day, another weak dollar story.
CBS Business Correspondent Anthony Mason gave viewers a one-sided report about what the weak dollar means to the U.S. economy on the November 12 “The Early Show.”
“[T]he weak dollar is really wreaking havoc on investor confidence and in many ways, the impact is just beginning to be felt,” Mason said. “The dollar, once the gold standard of currencies, is falling hard and fast around the world. At $1.46, the euro is up nearly 12 percent against the greenback. The yen traded at $110.38 per dollar, an 18-month high. And for the first time since 1976, the Canadian dollar has risen over 20 percent in value against the U.S. dollar at $1.06.”
Mason referred to supermodel Gisele Bundchen’s reported desire to not be paid in dollars (which her sister, who is her manager, claimed was “a joke by some journalist”) and the video of rap artist Jay-Z’s latest single “Blue Magic,” where he flashes a fistful of euros, as proof the declining dollar has infiltrated pop culture – items which previously appeared on The Wall Street Journal’s November 6 blog and CNBC’s November 7 “Mad Money” hosted by Jim Cramer.
While that’s what currency markets supposedly say about the dollar, there are other underlying stories. A weak dollar has its upside, beyond just encouraging European visitors to spend more in the United States, as Mason pointed out. Exports of U.S. goods increase, having a positive economic effect.
“This will increase the demand for U.S. dollars and bid up the price of U.S. dollars,” Dr. Gary L. Wolfram, a Business & Media Institute adviser, explained November 7. “One of the strongest parts of the U.S. economy in recent months has been exports, just as the value of the dollar has been declining.”
Another point left out of Mason’s report is that not everyone thinks the exchange rate of the dollar accurately reflects what the dollar is really worth.
“Though the dollar is grossly undervalued and it may not be far from the ultimate trough [versus the British pound] the market is likely to push it lower,'' said Stephen Jen, Morgan Stanley's London-based head of currency research, according to Bloomberg on November 10.
Mason also partially blamed the decline of the dollar for the rise in oil prices.
“[Y]ou go to a department store in New York right now and you're likely to get elbowed aside by a stampede of Europeans, who are here like on this feeding frenzy, because everything looks so cheap,” Mason said. “But that same thing, as I say, applies to oil. The same people who can buy everything here because it looks cheap, can buy oil because it looks cheap. That's raising your gas prices.”
However, a closer look at oil as it relates to the fall of the dollar suggests there’s more at play than just currency inflation. According to Dr. Mark J. Perry, a professor of economics and finance at the University of Michigan, the increase in oil prices versus the fall of the dollar doesn’t add up.
“A weak dollar doesn't justify $100 [a barrel] oil,” Perry wrote on his Carpe Diem blog. “Since Aug. 22, the dollar is down by only 8% against a basket of currencies while the oil price has risen by 40%.”
Perry related the price of oil to the price of natural gas to show $100 barrel oil cannot last. “On a relative basis – comparing the amount of energy bought with a dollar’s worth of oil with a dollar’s worth of natural gas – the price for natural gas is now about half that of oil, further suggesting that $100 oil is not sustainable,” he wrote.
Perry also blamed the high price of oil on speculation artificially boosting prices.
So, what’s causing the negative attitude toward the dollar? CNBC’s Larry Kudlow blamed the media.
“The dollar’s slump, particularly in the last six to 12 months, is because these currency markets think that the U.S. economy is crumbling,” Kudlow said on the October 12 “Hugh Hewitt Radio Show.” “They actually believe the crap that they read in The Financial Times and The New York Times – and I hate to say, but sometimes on the front page of The Wall Street Journal.”