Montana State University

Weakened dollar is a double-edged sword for Montanans, MSU profs say

April 18, 2008 -- Anne Pettinger, MSU News


Gary Caton, an MSU assistant professor of finance, says a weaker dollar on a global scale might actually bring considerable benefits to Montana as a whole. MSU photo by Kelly Gorham.    High-Res Available

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With the falling value of the U.S. dollar and a possible recession hot topics of discussion, it's easy to think the American economic outlook is bleaker than it has been in recent years. But according to several Montana State University professors, the situation is a complicated one, and a weaker dollar on a global scale might actually bring considerable benefits to Montana as a whole, particularly those in agriculture, energy and tourism.

It's important to keep several things in mind when considering the falling value of the dollar, said Gary Caton, an MSU assistant professor of finance. First, currency fluctuation is common and has been going on for years. Also, the value of the dollar has been trending downward since 2002, said Jamie Brown, an assistant professor in MSU's agricultural economics and economics department.

"This is not something that has only recently changed," Brown said.

In addition, it's important to note the U.S. dollar is not the only currency on a downward trend.

"It's a process that goes up and down, depending on how well the economies are doing," Caton said. "The U.S. is not isolated. The dollar changes because we are part of the global economy."

Determining whether a weakened dollar is a benefit or a detriment changes depending on one's perspective.

In general, Brown said, it's fairly clear who wins and who loses: Those who export will benefit, but those who buy more products from foreign countries will be harmed.

In Montana, there are many who would fall into the exporting category.

"It just so happens those (exporters) are big sectors of Montana -- people who rely on tourism, energy and agricultural products," Brown said.

The double-edged sword is particularly evident when considering travel. With the value of the euro, the common currency of the majority of European Union nations, rising against the dollar, tourists from Europe might decide it is a good time to travel to the United States. And, because Montana is known as a tourist destination, the Big Sky state might see a considerable amount of that tourism.

"More foreign tourists may visit Montana with Yellowstone, Glacier, and everything else we have to offer in our great state," Caton said.

However, it's probably not the best time for Montanans to travel to Europe, or even some places in Canada, Caton said, because the dollar currently wouldn't go as far in those places as it would in the U.S.

"For those of us who want to go to Italy or ski or shop in Canada, we might end up paying more. But for people who rely on Montana's tourism economy, a weaker dollar might be a good thing," Caton said.

Brown noted that because it is more expensive to go to popular destinations like Europe and Canada, more Americans might be inclined to take vacations in places like Montana, too -- though that benefit could be tempered by high gas prices.

Other industries could see positive effects, too. For example, Caton said, it's possible Montana will receive more manufacturing jobs with a weaker dollar as foreign companies look to invest in America.

Understanding currency values can be complicated, but Caton identified four primary factors that contribute to the value of currency: inflation, investment opportunities, the general economic environment and government policies and intervention.

Currency is only valuable to the extent a person can buy something with it, Caton added. Supply and demand drives the value of the dollar. If Americans demand a lot of goods from outside of the country, the value of the dollar will tend to decline.

"As the value of the dollar goes down, we'll demand less (from foreign sources)," Caton added, which will tend to drive the dollar's value back up.

Numbers can help put this issue in perspective: In 2000, the U.S. dollar bought 1.14 euros, Caton said. By 2002, it was below par, at .99. Today, the dollar will fetch about .63 euros.

But even though some positive things might happen in Montana as a result of a weaker dollar overseas, it's obviously not a trend that people want to see continue.

"We don't want to see the value of the dollar continue to drop," Caton said, for several reasons.

For starters, American consumers have been forced to pay more for products with a weakened dollar. For example, the price of gas for American drivers is increasing because, in addition to other factors, the value of the dollar is going down. With people in such a large, rural state like Montana dependent on vehicles, this has obviously created a hardship, Caton said.

On a global scale, a weakened dollar also means less political power.

"Foreign governments hold foreign currencies to make transactions," Caton explained. "The U.S. dollar is the primary currency in all central banks. If the dollar's value continues to go down over the long term, that might change, which would not be good for America's standing in the world."

Despite experts' best efforts at predicting what will happen with currency and economies, it's really nearly impossible to predict what will happen, Caton said.

"We can make our best guess, but that's all it is -- a guess," Caton said.

"There's no question (the declining value of the dollar) will impact the flow of trade across countries," Brown added. "But it's absolutely anyone's guess what exactly will happen."

Gary Caton, (406) 994-6190 or gary.caton@montana.edu, or Jamie Brown, (406) 994-5628 or jrbrown@montana.edu