Who's Up When the Dollar's Down?

Grocery tabs are rising, credit is crunched, the price of a barrel of oil has crashed through the $125 mark with no leveling-off in sight, and there’s talk of recession.

Then there’s the weak dollar. It’s trading at its lowest rates in a decade—down 37 percent from a peak in 2002 against an aggregate of world currencies, according to the U.S. Federal Reserve. The buck is also down 37 percent versus the Canadian dollar and 45 percent against the euro. (Canada and the European Union are two of Minnesota’s largest trading partners.)

For consumers and many businesses, a weak dollar means higher prices on foreign products and services, adding to an already burdensome cost of living. Travel abroad is also more costly.

But for some Minnesota businesses, the dollar’s weakness has actually been a source of strength. And that fact is providing some rays of sunlight in an otherwise cloudy economic picture.

“If you’re in the exporting business, all of a sudden your goods are becoming very competitive,” says Arthur Rolnick, senior vice president and director of research at the Federal Reserve Bank of Minneapolis. “If you’re in the business of selling abroad, you can sell more of your products, your goods look more competitive, your profits are higher, and you can pay your workers more.”

Indeed, Minnesota’s manufactured exports grew 6.5 percent to $16.2 billion in 2007. Minnesota’s strength in more specialized industries has acted as something of a buffer against the falling dollar. “It takes a while to switch proprietary products—which is one of our strengths—as opposed to widgets,” notes Bob Isaacson, director of communications, analysis, and research at the Department of Employment and Economic Development. “When companies work with suppliers, it’s a very long and drawn-out relationship—it’s not easy to change.”

Riding Out the Currency Storm

Explanations for the dollar’s decline include the trade deficit, the budget deficit, low interest rates, a and a weak economic outlook, to name a few. But according to the Fed’s Rolnick, none of these explanations is adequate.

“When the dollar was up, we had a huge trade deficit,” he notes. “You might want to blame it on the deficit that the dollar’s declined, but the deficit has actually shrunk.”