The purchasing power of the U.S. dollar has dropped almost 7% since March 1 in Europe, Japan, and Korea. Could this be the beginning of the long-expected depreciation of an overvalued dollar? If so, the trend could persist for several years, bringing higher inflation and higher credit costs and restraining economic growth.
This is what happened during the last period of sustained depreciation, which began in 1985 and lasted until 1989, with the dollar declining about 30% in value. Its current value is close to the 1985 peak. The dollar has also weakened almost 4% in Canada, 3% in the United Kingdom, and 2% to 3% in Taiwan, Thailand, the Philippines, and Singapore.
Already prices are likely rising for some electronics imports. The U.S. Import Price Index, excluding petroleum, increased 0.1% in March and 0.4% in April after more than a year of month-to-month declines. The April index rose 0.7% for Europe, 0.2% for Asia, excluding China, and was unchanged for Japan. These gains follow steady decreases over the previous year.
Computer import prices rose 0.2% in April after falling 6.6% in the previous 12 months. Similarly, telecom equipment import prices were unchanged in April following a 2.6% decline in the previous year. Ten-year Treasury Bill rates are up 0.3% since early March and corporate bond rates have risen 0.2%.
EBN's electronics trade-weighted exchange rate index indicates the dollar appreciated 43% between January 1996 and February 2002. Most of this happened during the 1997-98 Asian financial crisis. Some of the increase-perhaps as much as 20%-was due to overvaluation caused by short-term money flooding into the United States for higher investment returns and for safety in a troubled world.
The recent rapid rise of the U.S. balance of payments deficit to nearly 5% of GDP, record low interest rates to deflect the recession, and the long-stagnant stock market have combined to reduce the capital inflow from abroad and initiated the dollar's depreciation.
If the dollar continues to weaken, OEM component buyers will have an opportunity to shift sourcing to lower-cost countries. A weaker dollar would make sourcing in China, Hong Kong, and Malaysia more attractive because their currencies are fixed to the dollar and have depreciated with it.