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A Weak Dollar Is Bad? Guess Again.

At the beginning of the decade, you could exchange a euro and get about $0.90. Today that same euro fetches nearly $1.45. Obviously, this means that gelato you buy in Firenze costs a heck of a lot more greenbacks than it did a few years ago. But hey, quit complaining -- at least you get to go to Europe.

It also means that folks from Germany, France, and Belgium are coming to the United States by the planeload and exchanging their pocket money for suddenly deeply discounted American goods, services, buildings, small towns, and Jerry Lewis memorabilia. The folks running eBay (Nasdaq: EBAY  ) have to be thrilled, as do, I suppose, the Europeans.

Know who else is thrilled? The people and companies based in the United States that make stuff. You see, a weak dollar is great for stuff-makers. It's less great for stuff-consumers, but not in the way you might suspect.

Currencies are instruments of national fiscal policy, which is why governments openly and blatantly manipulate their rates of exchange. Think all of the weathervanes on Capitol Hill are sincere when they bellyache about the weak U.S. dollar? Think again -- it's a great vote-getting gambit, because a strong currency "projects" economic strength. But they're perfectly happy for the dollar to remain low.

Make your checks payable to "Boeing"
A weak local currency favors the producers of stuff because it gives those producers an advantage over their foreign counterparts.

This is why, for example, the tides have completely turned in the last few years between Boeing (NYSE: BA  ) and Airbus. Hardly a week goes by without some foreign airline, be it Singapore Airlines or Emirates or Aeroflot, announcing a large new order for Boeing jets. Certainly, Airbus can't seem to get out of its own way with production delays, but Boeing's cost advantage -- due to most of its production costs being denominated in now-60% off sawbucks -- has helped it just crush Airbus. In effect, Airbus is subsidizing Boeing. But you know who else is?

You are.

Cheap currencies are a way of transferring economic power from consumers to domestic producers. No, you're not really writing a check to Boeing. But if you wanted to buy a new car and elected to buy a Nissan (Nasdaq: NSANY  ) , you have lower purchasing power vis-a-vis the Japanese yen than you would sticking with a General Motors (NYSE: GM  ) car. Your purchasing power is skewed toward domestic producers -- even if you elect to buy a foreign good anyway.

Too rich to buy anything
Now back to Washington, D.C. What do you think politicians believe on the issue of "more American production?" Low currency means high returns on capital (demonstrably true over the past five years); it also means that foreign investors will pour in to chase relatively cheap assets. It also stimulates employment and production, and domestic corporate profitability soars. What could be bad about that? Well, inflation, for one thing.

When I recently traveled to Argentina, I marveled at how dirt cheap everything was. Goods, services, steaks (which in Argentina get their own category, even outside of "goods"), were all priced at a fraction of what they'd cost in the United States (much less Europe). Economic theories on purchasing power parity state that such a disparity ought to even out over time. But notice how "economic theory" is never a candidate for office?

In Argentina, the government "solved" the potential for a weak currency to cause inflation (which is how it works, rather than the other way around) by taxing its agricultural exports. Want to know why foreign investment doesn't pour into Argentina? Witness Exhibit A.

Making things as cheaply as possible
The biggest manipulators of their currencies, though, are in Asia. In fact, for decades, the Japanese favoring of production over consumption stemmed from a systemic depression of yen values. The same thing is happening in China today.

Throughout the world -- even in China -- you hear calls for the government to allow its currency to increase against the dollar. Meanwhile, dirt cheap Chinese labor allows for Nike (NYSE: NKE  ) , Motorola (NYSE: MOT  ) , and General Electric (NYSE: GE  ) to produce their goods there for export back into the United States. The cheap yuan, like the cheap yen in Japan decades before, fueled Chinese growth. And one of the main subsidizers of this growth was cheaper Chinese labor.

The other? Foreign businesses, left with little choice but to up and move their production to where it was relatively cheap -- to China. All because the Chinese have their thumb on their currency.

As the U.S. economy flirts heavily with recession, and domestic consumption drops, do you believe that a weak U.S. dollar is an accident, or something that the government doesn't want?

Me either.

Want to learn how to play the currencies?
There are hundreds of places where you can learn how to trade currencies. I recommend none of them. I do, however, believe that people focusing on companies that make money in multinational environments can do very well as undervalued currencies inevitably revalue. At Global Gains, we find global companies each month that have low levels of exposure to the U.S. market. Check out our service and our stock recommendations free for 30 days, with my compliments.

Hope to see you there!

Bill Mann is the advisor of Global Gains and owns none of the companies mentioned. Nissan is a Global Gains recommendation and eBay is a Stock Advisor selection. The Fool has a disclosure policy.

Read/Post Comments (3) | Recommend This Article (143)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 16, 2008, at 3:51 AM, none0such wrote:

    What if other countries (China, Japan) stop buying low yielding US treasuries? They have been buying as a way to stop their own currency's appreciation against the dollar. With the noose long enough we don't mind, in effect, spending what others save but the possibility of the rope shortening is always there. The Federal Reserve's prime mission is to keep inflation in check, period. The fact that they aren't means our retirement savings must work harder now to circumvent this fiscal dilemma. And Argentina? Now they have export bans on certain crops because no one wants to sell domestically. Bill, say you ain't a populist at heart.

  • Report this Comment On September 08, 2009, at 7:39 PM, oregina wrote:

    "The Federal Reserve's prime mission is to keep inflation in check, period."

    ---- Not quite true.

    Their mission is to implement monetary policy to promote employment and provide for stable interest rates and stable prices. Of course, that is in addition to regulating financial institutions.

    Inflation can be a necessary evil. When our dollar is undervalued against a foreign currency, our goods will be cheaper for foreign consumers. That gives us a competitive advantage. Think about what that means: more demand for U.S. goods! Increased demand means increased production. American companies will need to hire more employees to meet production requirements. It's a long slow process, but in the end it will create an equilibrium until the dollar begins to rise again. It's a cycle that goes up and down.

    Right now, the "weak" dollar is a good thing for our domestic economy!

  • Report this Comment On August 30, 2011, at 10:24 PM, dnice0123 wrote:

    Its not a good thing when Arab Springs are an indirect result of our monetary policy. Think about how this what you deem is good for one country effects others. Its rotten to the core. And just becase we are the Good Ole US of A we should allow for it?

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