Our graph shows the Trade Weighted Exchange Index: Major Currencies. While this is a nominal series, the Price-adjusted Major Currencies Dollar Index shows a similar pattern as does the Price-adjusted Broad Dollar Index. Our recent dollar devaluation has put the dollar near its weakest level since we went off the Bretton Woods regime. Martin Feldstein celebrates this reality:
The dollar has finally begun its long overdue correction. The dollar’s decline in recent weeks is just a prelude to the much more substantial fall needed to shrink the US current account deficit, running at a nearly $800bn annual rate, about 6 per cent of gross domestic product. If the dollar remained at its current level, the US trade deficit would continue to expand because Americans respond to rising incomes by increasing imports more rapidly than foreign buyers raise their imports from the US. Although a faster growth rate in the rest of the world would raise US exports and reduce the US trade deficit, experience shows that even substantially faster foreign growth would have only a very small impact. A lower dollar has to do most of the work of reducing the global trade imbalance.
This seems about right to me.
Update: An AB reader directs us to Peter Schiff:
A cheaper dollar helps domestic manufacturers because it makes local costs, such as wages and rents, decline in relation to the costs borne by international competitors. While this is true, it also means that American workers and landlords see a corresponding decline in the real values of their pay and rent. Given that such declines negatively impact living standards, such developments hardly seem worth celebrating. Too often overlooked however is how the weakening dollar also works to increase costs for domestic manufacturers. A falling dollar raises the costs of raw materials, such as oil and metals, while simultaneously decreasing the relative costs that foreign competitors pay for the same supplies. But it is not just raw materials prices that rise. Perhaps even more important will be the prices of foreign-made components that are used in American factories. In fact, many American “manufacturers” are really nothing more than assemblers of imported components.
Peter is raising two important points: (1) the terms of trade effect is limited to our value added; and (2) it comes at the cost of lower real wages. He’s correct on both points. But then market corrections of imbalances are often not easy and not pretty. If there is some more effective and less costly means of correcting the trade imbalance, the liberal in me would love to hear it.