John W. Schoen • Profile • E-mail

This week, dollars seem to be on readers minds. Tayeb in Algiers wants to know why the dollar is falling — even though the U.S. economy remains fairly healthy. Hugh in Maryland figures all that gold in Fort Knox should help. And Joseph in California has a different problem: He just ran over $500 in cash with his lawnmower and wants to know how to salvage it.

Why is the strength of the GDP not reflected by the dollar?
— Tayeb C., Algiers

One reason is that, lately, the nation's gross domestic product hasn’t been showing a lot of strength. The most recent numbers, released Friday, show the U.S. economy expanding just 1.3 percent in the first quarter of this year.

But the dollar’s slide has been going on now for years — roughly since the U.S. emerged from a brief recession in mid-2001. Between then and the most recent quarter, GDP averaged a respectable 2.9 percent.

During that same period, depending on what currency you use for comparison, the dollar was getting hammered around the globe. Measured in euros, the currency used by the only  economy roughly the same size as the U.S., the dollar has fallen more than 50 percent from its peak in October 2000. And the dollar is near a 26-year low against the British pound.

While it’s true that the strength of a country’s economy is loosely connected to the value of its currency, a lot depends on where that economic growth is coming from. And the U.S. economy is now largely dependent on American consumers buying things, not making them. Consumer spending accounts for about 70 cents of every dollar of U.S. GDP.

Because much of what we buy comes from other countries, we send more dollars than goods to most of our trading partners. In other words, dollars have become our biggest export. Like everything else, as supply goes up, demand goes down; the more dollars we send overseas, the less they’re worth in the countries we send them to.

A weak dollar isn’t necessarily all bad. Sure, it makes it more expensive for an American tourist to buy a hamburger in Hamburg. But many American companies, workers and shareholders benefit from a weak dollar. For one thing, it makes American products cheaper when they land on store shelves in other countries; if your country's currency gets stronger in relation to the dollar, American products — priced in dollars — begin to look like bargains. And that helps American companies export more of what they make.

As American companies expand globally, that weak dollar also helps boost profits from overseas operations. When you bring profits earned in strong overseas currencies back home and convert them back into dollars, you get more bang for your bucks.

This isn’t the first time we’ve seen this movie: The dollar got hammered in the mid-1980s when Japan and Germany came on strong as global economic competitors. From March 1985 through December 1987, the dollar lost more than 50 percent of its value against the Japanese yen and German mark. But after Japan’s real estate and stock markets began to unwind, and West Germany absorbed East Germany’s sputtering economy, those currencies cooled down, and the dollar got back on its feet again.

Today, there are new forces weighing on the dollar. High oil prices, for one, aren’t helping. Because oil is typically priced in dollars, the rise in the value of each barrel means every dollar buys less oil. Cheap imports from emerging economies like China — while they stretch American paychecks and help keep a lid on inflation — are also soaking up dollars that have to be recycled faster.

Where does all this go from here? Sorry, we gave up on our crystal ball when it kept projecting that a two-bedroom condo in Florida would be worth $40 million by the end of this decade. Despite the insistence of gloom-and-doom bloggers that the dollar’s end is nigh, no one really knows.

A lot depends on how quickly the value of a currency changes; gradual moves can help smooth the impact of bigger changes in the global economy. It’s the sharp, sudden moves that cause problems. (See: Asia, circa 1997; Argentina, 2001.)

It’s also highly unlikely that the dollar will keep going down forever. The big question is: What will cause it to turn around? One possibility is that our government finally stops running huge budget deficits — which probably means raising taxes or cutting spending (or both). Another way to help the dollar would be to encourage Americans to put away their credit cards and start pulling more of those dollars sloshing around overseas back into their savings accounts.

The other alternative is to keep spending more than we have — and borrow the money from the people and governments that are accumulated our currency outside the U.S. But that route will be more expensive: we’ll have to pay every higher interest rates to prop up the value of those dollars and keep them flowing back home.

And that will raise the cost of every dollar we borrow — no matter where it comes from.

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