The Dollar and Stock Prices

Dollar Hits Low Against the Euro
Paul Blustein
Washington Post, November 6, 2004, Page E1

Dollar Skids, Despite Stock Rally and a Strong Jobs Report
Jonathan Fuerbringer
New York Times, November 6, 2004, Page B1

These article reports on the dollar's fall to a new record low against the euro. At one point the Times article asserts that "a further decline in the dollar may be a drag on stocks by discouraging foreigners from buying equities in the United States." Actually, the opposite should be true. As long as foreigners fear that the dollar may decline, they have reason not to buy stock in the United States, since a fall in the dollar would lower their returns. However, once the dollar has fallen substantially, they have less reason to believe that it will fall further, so U.S. stocks should be more attractive. In other words, foreign investors fear a falling dollar, not a dollar that is low in value.

The Post presents a warning from former Treasury Secretary Lawrence Summers that a sharp decline in the dollar could lead to higher interest rates and a recession. It would have been worth noting that Mr. Summers helped lay the basis for this scenario by actively promoting a high dollar during his tenure as Treasury Secretary. The over-valued dollar has led to a large and unsustainable trade deficit. The only way for this deficit to be corrected is with a sharp decline in the dollar and/or a recession.