The value of the U.S. dollar against European currencies is currently in something approximating free fall. In the short term that phenomenon does not have much immediate effect on Americans' standard of living, as long as they don't venture overseas.
The real problem, however, is that the dollar's decline as the international currency of choice reflects an overall assessment by the global economy that the United States is currently being governed badly from a fiscal point of view, and that its government is not worthy of the confidence that the market suggests in the U.S. economy when it buys dollar-denominated bonds and invests here.
It currently costs $1.27 to buy a euro; in the first year of the Bush Administration it was at 85 cents; the dollar fell 16.5 percent against the euro during 2003 alone. A British pound costs $1.82 now; in 2001 it was at $1.37.
The lower value of the dollar reflects supply and demand. European, Japanese, and Chinese investors do not want to buy or hold dollars. Foreign investors are thus no longer pouring their previous $1.5 billion a day into the U.S. economy. Instead, they are buying bonds in euros and investing in China and a reviving Japanese economy. They consider the U.S. stock market to be overvalued.
On the street level, the formerly ubiquitous $100 bill is less and less the basic black market currency, taking away the float the United States has enjoyed for years from its use in the informal economy.
From the point of view of American companies, a cheaper dollar makes U.S. exports cheaper and thus more competitive. This would be considered a positive factor except that the global economy is now so intertwined that it is less useful than it used to be.
Furthermore, on the negative side, American consumers' appetite for imports has not slackened even as the prices of those imports have risen because of the lower value of the dollar.
What lies behind foreign investors' lessened confidence in the formerly almighty dollar?
The fact of the matter is that, in spite of the rising stock market and the economic recovery, in the eyes of the world the U.S. economy has serious problems.
First among these is the $500 billion budget deficit projected for this year, uncovered because of President Bush's tax cuts. Budget deficits lead to inflation, which is, in effect, devaluation of a country's currency. A devalued currency is definitely not an attractive parking place for money.
Federal Reserve Chairman Alan Greenspan is keeping the benchmark short-term interest rate at a low 1 percent to prevent that very inflation. The side effect of low interest rates, of course, is that the United States thus becomes less attractive as a market for foreign investors.
When will the dollar go back up? The short answer is when foreign investors' confidence in the U.S. economy goes back up and they want to hold dollars again, as opposed to euros, pounds, or Swiss francs. That will occur when they assess that the basic problems of the U.S. economy are being addressed.
Job levels are key to an assessment of the basic health of the U.S. economy. Gross domestic product turns largely on consumer spending. The equity was squeezed out of Americans' homes last year so that can no longer fund consumption. The jobless don't buy.
No easy fix is available to this tangled problem for the Bush Administration or anyone else. Cutting government domestic spending to pay for the war probably doesn't help much either, with its impact on employment, although defense spending does put money into the economy, creating and maintaining jobs.
In the meantime, imported goods will cost more and Americans traveling abroad will take a licking when they go to an ATM or a bank there. All we can do for now is live with it.
Or we can do what the old advertising campaign said and "See America First."