AOW_12_Gr1112_NGSSS The Sinking Dollar
What does it mean to say the dollar is ‘weak’?
In the realm of currency values, everything is relative. A currency is described as weak if
it purchases fewer goods or services than other currencies. By that standard, the U.S.
greenback is far weaker now than it was in the 1990s. The Economist has a clever way to
gauge the relative purchasing power of the world’s major currencies: Its “Big Mac index”
measures how much currency is needed to buy the signature McDonald’s sandwich in
various countries. Eight years ago, it took roughly the same number of dollars to buy a
Big Mac in Rome or London as it did in the U.S.—in other words, the dollar’s purchasing
power was about equal to the purchasing power of the British pound or the euro. But
now, a Big Mac in the U.S. costs $3.57; in London, the same sandwich costs the
equivalent of $4.57, while in Rome, it costs the equivalent of $5.34.
Why the plunge in value?
There’s no simple answer. Currency values, which are determined in trading among
banks and other large institutions around the globe, reflect everything from a nation’s
interest rates to its budget deficits to its political climate. But in general, the dollar’s
value reflects the degree of confidence that foreigners have in the U.S. economy. The
housing crisis, the long and costly Iraq war, the soaring budget deficit, and the exploding
national debt have shaken that confidence. “I should not presume to tell the U.S. how to
manage its fiscal house,” says Canadian politician Barry Campbell, whose own country’s
dollar is now worth slightly more than the American version, after years of being worth
about 80 American cents. “But you can’t cut taxes and fight a war and balance the
books.” Indeed, economists say the U.S. government can’t keep living beyond its means
without eventually paying the bill.
When will that bill come due?
In a sense, it already has—in the form of higher prices for imported goods. It now takes
more dollars than it did just a few years ago to buy the same amount of Italian balsamic
vinegar, Chinese T-shirts, or Japanese electronics. Shig Chiba, owner of a Los Angeles
sushi restaurant, now pays $60 a pound for imported fatty tuna that cost $38 a pound a
year ago. He has raised menu prices 10 percent and is trimming costs, but it’s tough. “I’m
doing what I can,” Chiba says. “I don’t know how long I can hold out.”
What else does the dollar affect?
Nearly everything, because the decline in its value has pushed up U.S. interest rates.
Foreigners every year buy billions of dollars of U.S. Treasury bonds, which finance
everything from the Iraq war to the recent round of federal tax rebates. China alone holds
$700 billion of Treasury debt. Those bond buyers are starting to demand higher interest
payments from the U.S., to compensate them for the dollar’s declining purchasing power.
That means that American taxpayers must pay higher interest rates on the national debt,
as well as higher rates on mortgage and other consumer finance loans. Economist
RobertBarbera, for one, finds it alarming that China now can determine U.S. interest
rates. “It is not a U.S. call,’’ he says, “and that is a profound change.’’
Secondary Reading High School, Supplemental Articles 1112, December 12, 2011
1 AOW_12_Gr1112_NGSSS Does a devalued currency help anyone?
It sure does. In fact, the weak dollar may be what’s been keeping the U.S. out of
recession. American-made goods now look cheap to foreign buyers, and that’s good news
for the sector of the U.S. economy that relies on exports. The Commerce Department
recently revised upward its estimate of second-quarter economic growth, precisely
because foreigners are flocking to buy bargain-priced U.S. exports. James Griffith, CEO
of Timken, an Ohio manufacturer of ball bearings, says the jump in foreign orders has
more than offset a decline in business from U.S. auto companies. “When China decides
they want to build a car,” he says, “somebody runs a steel mill with coal and iron ore out
of Australia, and they mine it with Caterpillar dump trucks, which are full of Timken
bearings.”
Can Washington do anything to strengthen the dollar?
There are no quick fixes. The best thing the U.S. could do in the long term is get its fiscal
house in order, which means reducing the budget deficit and enacting policies that
encourage Americans to save money rather than spend it on imports. In the short term,
the Federal Reserve could intervene in world currency markets, buying the dollar and
selling pounds, euros, yen, and other currencies. But the currency markets are the world’s
largest, with $1 trillion changing hands every business day, and it would require hundreds
of billions of dollars to move currency exchange rates even a little.
Will any of that happen?
Not in the near future. For now, Washing-ton seems disinclined to intervene, in part
because in the last several weeks, the dollar has recovered about 20 percent of the value it
lost against the world’s major currencies since the beginning of the year. But that likely
has less to do with optimism about American economic prospects than with pessimism
about the state of the global economy. Says Harvard economist Kenneth Rogoff, “It’s the
rest of the world going down, not the United States going up.”
The soaring price of oil
It’s usually assumed that high oil prices encourage oil-producing countries to drill more
oil—after all, the more they pump out of the ground, the more they’ll earn. Yet, while oil
prices have been rising steadily and rapidly since 2002, drilling in the Middle East has
expanded only modestly. The reason? Blame the weak dollar. The dollar is the global oil
industry’s currency of choice—wherever oil is sold in the world, it’s paid for in dollars.
That means oil producers have an expanding supply of dollars, but the value of those
dollars is rapidly shrinking. In addition, just like American consumers, those countries
need more dollars to buy the same amount of goods—the definition of inflation. With
less real wealth, oil-producing countries are faced with the choice of investing in oil
exploration, or spending their wealth to meet other national needs. In many cases, they’re
investing their money elsewhere. “Drilling activities would be higher if current oil prices
were associated with a stronger dollar,” says economist A.F. Alhajji of Ohio Northern
University. “Dollar depreciation reduces oil supply,” he says—just one more bit of bad
news for already beleaguered American consumers.
Source: The Week 9/12/08
Secondary Reading High School, Supplemental Articles 1112, December 12, 2011
2 AOW_12_Gr1112_NGSSS The Sinking Dollar
1. Read this sentence from the passage
“In the short term, the Federal Reserve could intervene in world currency markets,
buying the dollar and selling pounds, euros yen, and other currencies.”
What does the word intervene mean in the sentence above?
a. Destroy
b. Take advantage of
c. Take control
d. Interfere
2. If the dollar continues to lose value, what will some of the effects be for the
United States?
a. Oil will be cheaper
b. Taxes will be cut
c. Goods will become more expensive.
d. The war will end
3. The boldfaced subheadings guide the reader to sections that describe
a. Questions about the economic status around the world
b. Questions on the United States economic crisis
c. Questions that will effect foreign policy and dollar exchange
d. Questions about China and its control over the U.S.
4. What is the purpose of the “ Big Mac index”?
a. To try to purchase Big Mac supplies from other countries at a cheaper
price
b. To compare and contrast how much a Big Mac is in each country
relative to the US.
c. To analyze the value of the dollar in Europe.
d. To illustrate the amount of money spent on American products outside
of the US.
5. Based on the passage, how is the confidence of foreigners towards the
American dollar?
a. Foreigners believe the dollar is cheap and therefore are buying
American products
b. Foreigners are refusing to invest in American products and therefore the
dollar is lowering in value
c. China is the only country investing in our country
d. Canada has begun to invest in the United States now that Canadian
money has more value than the US dollar.
Secondary Reading High School, Supplemental Articles 1112, December 12, 2011
3 AOW_12_Gr1112_NGSSS Sinking Dollar
Answer Key
CCL
Answer
NGSSS
NGSSS
Moderate
1. D
LA.A.1112.1.6.3
Context clues
High
2. C
LA.A.1112.1.7.4
Cause & Effect
High
3. B
LA.A.1112.1.7.5
Text Structures & Organizational
Patterns
High
4. B
LA.A.1112.1.7.2
Author’s Purpose, Author’s
Perspective & Author’s Bias
Moderate
5. A
LA.A.1112.1.7.3
Main idea, summary statement,
Relevant details,
Conclusions/Inferences &
Predictions
Secondary Reading High School, Supplemental Articles 1112, December 12, 2011
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