As dollar declines, Americans living overseas are watching their wallets
November 14, 2004
BAUMHOLDER, Germany — For soldiers, sailors, Marines and airmen living overseas, the near-record decline of the dollar’s buying power is far more than a historical footnote.
It’s day-to-day reality.
“It’s a terrible situation for Americans living overseas,” earning dollars, but making purchases or paying bills in foreign currencies, said Michael L. Levy, a Vancouver, British Columbia-based currency analyst.
Americans in Europe have lost 30 percent of their buying power during the dollar’s two-year decline against the euro, for example, only slightly offset by cost-of-living adjustments, said Levy, executive vice president of Custom House Global Foreign Exchange, North America’s largest independent currency brokerage.
Since December 2003, the South Korean won’s value rose by about 8 percent against the dollar as of early November. Japan’s yen has risen by about 1.2 percent; the British pound 4.12 percent.
And, there’s no end in sight, many analysts say.
The cost of living overseas is becoming so great that it may have an adverse affect on the U.S. military, according to F. Trenery Dolbear Jr., the Clinton S. Darling professor of economics at Brandeis University International Business School in Boston.
“There may simply come a point where U.S. personnel can’t afford to live in expensive places and [then] make a decision to get out,” Dolbear said.
Though the Bush administration has proposed a major drawdown of U.S. forces in Europe, the United States still will have a sizable presence in Germany, as well as at NATO commands across Europe and in Turkey.
If the dollar keeps falling, the Department of Defense may have to provide additional financial incentives, above COLAs, to convince people to live in expensive places, Dolbear said.
Why does no one want to buy U.S. dollars right now? It boils down to too many of them floating around.
The main problem the U.S. economy — and, by extension, the dollar — faces is that the federal government is spending more than it’s taking in — a lot more, to the tune of a $4.2 trillion national debt.
The federal government’s operating budget deficit — the difference between what the government spends and what it is taking in — is about $450 billion, 44 percent of which is financed by Asian investors, mostly in Japan and China, Levy said.
Foreign governments are covering that gap by buying U.S. government securities — buying American debt in exchange for a guaranteed return on that investment.
On top of a federal operating deficit, there’s a huge current account deficit of about $600 billion, Levy said. “Over 600 billion!” Levy said, repeating the figure for emphasis.
That’s the difference between the dollars flowing out of America in purchases of finished foreign goods — especially to China and Japan — and the money flowing back in from the sales abroad of American-made goods.
With the current account deficit, “basically foreign governments are keeping the ball rolling by buying our debt,” Dolbear said.
So, what does the future hold? Each expert interviewed by Stars and Stripes prefaced his remarks with the caveat, “Anything can happen.” And certainly, there are infinite variables that can affect the value of the dollar.
Some, like the Bush administration’s desire to make $1.85 trillion in tax cuts permanent, could hurt if those cuts further inflate the operating deficit.
American products priced in dollars will be a better bargain and U.S. exports should rise, “but that happens very slowly. That’s not going to bail us out.” Dolbear said.
Interest rate hikes could help, luring in dollars from overseas, but would in the long term be a disaster for the U.S. economy by slowing consumers’ big-ticket purchases, Levy said.
All experts consulted by Stars and Stripes agreed that if any measures could cause the dollar to reverse course, it would be the Bush administration making significant inroads at reducing the operating deficit.
“But it’s not the design of this administration to change the way things are going,” Levy said.
For the foreseeable future, the Bush administration is happy with the dollar’s decline because it provides a built-in discount when paying back government debt, while boosting U.S. exports, say the experts.
“The government is quite content to let the dollar drop at least till there’s a lot of hurting and screaming goes on,” said Terry Joyce, vice president, head of foreign exchange marketing at Birmingham, Ala.-based Regions Financial Corp.
Europe is hurting the most, with the dollar depressing sales of goods for economies that are seeing low growth and low consumer confidence, particularly Germany, said Joyce and others.
Foreign governments and trade and financial institutions may begin putting diplomatic and economic pressure on the Bush administration to change its weak dollar policy.
The rise of the euro against the dollar has been “brutal” and “unwelcome,” Jean-Claude Triche, president of the European Central Bank said last week according to news reports.
Japan and China own about 44 percent of the U.S. deficit. With the dollar dropping, “at what point do these investors say they don’t want to buy more U.S. debt?” Levy said. Or, he added, will they be content to try to make up the shortfall by selling us finished goods?
Moreover, investors in the Middle East and Asia seem to be diversifying their holdings, Joyce said. Investors looked to the dollar for shelter in turbulent economic times, Dolbear said. “Now they seem to be looking at the euro.”
Alas, the experts see a greater chance of the dollar dropping further over the long haul.
Joyce said he sees little chance of the dollar returning to parity with the euro over the next two years.
Levy sees some good news on the horizon in the form of a “quite significant correction” in the value of the dollar, “possibly as much as 10 percent.”
But, said Levy and others, sooner or later, the dollar will resume its fall if neither the American consumer nor the Bush administration changes their spending habits.
¶ Impact of dollar's decline starting to be felt by Americans living in South Korea (Click here)
¶ In Japan, Americans see COLA as buffer against dipping dollar (Click here)
¶ Euro's strength against dollar makes off-post shopping seem less attractive (Click here)