As a columnist who occasionally is tempted to use inflammatory rhetoric, I should not be too critical. Still, the words that journalists and politicians choose to describe exchange rate movements often are misleadingly overwrought.
Take market reactions to U.S. election news. The day before voting, a U.S. dollar bought 0.785 euros. When Bush’s re-election hit the newswires, headlines shrieked that the dollar was “plunging” and the euro was “soaring.” Indeed, the dollar fell in value against the euro all that week. By that Friday, it bought only 0.772 euros.
That the dollar bought 1.5 percent fewer euros affects some businesses. It also relates how markets assess the U.S. economy together with Europe’s. It does not, however, justify descriptors such as “plunging” or “soaring” or the phrases “free-fall” and “panicked rush for the fire exits” that graced exchange-rate reports by reputable news media.
Currencies have prices, just as do onions, toilet paper and unleaded gasoline. Prices tend to fluctuate — up and down — for goods and services. Currencies are no exception. Yes, money is different in that it can be created and destroyed by central banks in a way that cauliflower or haircuts cannot be.
Still, it is silly to get excited at price movements for currencies that would not raise eyebrows at the meat counter or gas pump.
Consider three different items. From January 1999 to the present, the price of one item varied a great deal. The highest price was 130 percent above the lowest. But its price is just 5 percent below where it was in January 1999.
The second good’s price also varied. Over the same period, its high price also was 130 percent above its low. This product, however, did not end up close to its starting point like the first. Instead, in mid-November 2004, it cost 110 percent more than on Jan. 4, 1999.
The third item varied somewhat. At its peak, it cost 57 percent more than at its cheapest point. It ended the period, however, costing only 9 percent more than at the start.
The first item was soybeans, the second gasoline and the third the euro, all priced in U.S. dollars. Consumers hate ongoing high gas prices. Farmers hate the fact that soybean prices have fallen 45 percent since May. Both groups, however, will weather such adverse price fluctuations. So will the economy of the European Union.
When the euro debuted in 1999 at $1.19, no EU officials bemoaned its strength. Nor did they apologize when it fell in value by 30 percent against the dollar in its first 22 months. Now that its dollar price has returned to a dime above where it started six years ago, they should quit complaining.
The cheapening dollar bears an important message to U.S. citizens about the policy choices their government is making. It should be far down, however, on any list of European problems.
© 2004 Edward Lotterman
Chanarambie Consulting, Inc.