This article in the New York Times(subscription may be required)instructs us in the negative consequences of a falling dollar:
America's trade imbalance can be corrected, the current reasoning goes, with a much cheaper dollar - perhaps 30 percent cheaper than it is today. The idea - supported by Treasury Secretary John Snow and Alan Greenspan, the Federal Reserve chairman - is that this would raise the price of imports for Americans, who would thus buy less from abroad. A cheaper dollar would also supposedly allow us to sell more to the world by making our exports less expensive.
Here is what's wrong with this analysis.
A falling dollar is unlikely to curtail imports as much as hoped. It is more likely instead to act as a consumption tax. About one-quarter of the United States import bill arises from oil purchases, which are priced in dollars. A rapidly depreciating dollar thus means lower earnings for OPEC producers. In response, the cartel might well raise prices. Goods from Asia, especially China, account for at least another 25 percent of our import bill. Because these computers, machine tools, TV's and toys are essential to our work and lifestyle, chances are that we will still buy them, even at higher prices.
Nor will a cheaper dollar encourage domestic production that can replace imports, as some argue. Auto parts, for instance, are increasingly produced in Mexico and other developing nations. These plants, part of a highly specialized global supply line, are not likely to be replaced by suppliers in the United States just because of temporary currency movements.
American exports, meanwhile, will not be spurred as much as most forecasters hope. Because currencies' values are relative to one another, the lower the dollar gets, the higher the euro and yen rise. As the currencies of Europe and Japan strengthen, the exports of these nations will become more expensive. That could easily translate into slower growth in those already slow-growing regions - and less money to buy our exports.
There's lots more analysis at the link, and reading the whole piece really is an education in macroeconomics.
