The U.S. dollar’s recent decline against the Canadian dollar, the euro, and even the Indian rupee, means Americans will pay more for imports and trips to Paris, Rome, Bangalore and Toronto. It also may drive overseas demand for U.S. goods and help raise profits at U.S. multinational corporations.
The U.S. dollar reached 1-to-1 parity against the Canadian dollar Thursday for the first time since November 1976. That means one Canadian dollar now buys one U.S. dollar, so a bottle of maple syrup could cost an American as much in Toronto as it does in New York.
Today’s numbers, however, do not mean that the dollar is facing a meltdown.
Thursday’s drop is of greater concern to currency markets than U.S. households, except “if you’re a connoisseur of French wines or Canadian maple syrup,” said David Gilmore, a partner at Foreign Exchange Analytics in Essex, Conn.
A lower dollar makes U.S. exports more competitive, which is good news for American manufacturers but spells rising prices for imports to the U.S. The dollar’s decline also diminished the spending power of American tourists while attracting to the U.S. foreign visitors who seek cheaper accommodations and shopping.
Daina Jefferies exited Macy’s at the Walden Galleria Mall in the Buffalo suburb of Cheektowaga, about 10 miles from the Canadian border, and added a couple of bags to a collection already in the back of her car.
“I just bought the same things I bought last week in Toronto for half the price,” she said. “I’m going to go home and return them. I knew I was coming so I thought I wouldn’t take the tags off. Now there’s no way I’m keeping it because it’s twice as expensive.”
Krys Esteves of Caledon, near Toronto, headed into the mall with her mother, Maria Swica of Mississauga, Ontario, planning to take advantage of weaker American dollar.
“My son wants a soft-serve ice cream maker for Christmas so I’m looking for that,” Esteves said. “It’s just to compare. Right now, I know it’s definitely to our advantage.”
The Canadian dollar hovered near parity in late New York trading Thursday, buying 99.93 U.S. cents.
Known as the loonie because of the bird pictured on the one-dollar coin, Canada’s currency rose sharply against the U.S. dollar after the Federal Reserve on Tuesday announced a dramatic half-point cut in its benchmark interest rates. While aimed at shoring up U.S. credit markets, the cut further weakened the dollar against other currencies by reducing returns on dollar-denominated investments.
Even before the rate cut, the Canadian dollar experienced a summer of record highs. Canada, a major oil exporter, has benefited from soaring crude prices and a strong economy.
Oil prices surged into record territory Thursday as the weakening U.S. dollar fueled buying by making futures cheaper for foreign investors.
“The Canadian economy that once used to be the sleepy little resource backwater of the North American economy is certainly turning the tables on its big brother in a hurry,” said Jeff Rubin, chief economist and strategist at CIBC World Markets.
The United States, meanwhile, has suffered a collapse of much of its housing market and a worsening credit crunch, prompting the Fed’s dramatic action this week. The central bank is far less concerned about the value of the nation’s currency, however, said Michael Woolfolk, senior currency strategist at the Bank of New YorkÂ .
“There’s a conspicuous silence coming from the Fed with respect to the value of the dollar,” he said.
A lower currency typically fosters worries about inflation, but the U.S. dollar’s decline over the last year has been too gradual for the Fed to consider intervening by raising interest rates, Woolfolk said.
The U.S. currency also plummeted to a new low Thursday against the 13-nation euro, which traded above $1.40 for the first time since it was introduced in 1999. The euro rose as high as $1.4098 Thursday before falling back to $1.4076, up from $1.3964 late Wednesday.
The $1.40 level has long been viewed as a key benchmark in terms of driving the euro toward becoming a reserve currency of choice – a position long held by the now-weakening dollar.
The dollar was down across the board Thursday, dropping to a nine-year low against the Indian rupee amid strong demand from foreign funds investing in India’s booming economy. The rupee rose to 39.92 per dollar in intraday trading, breaching the 40 rupees-per-dollar mark for the first time since May 1998.
The dollar also dipped against the British pound, falling to $2.0099 from $2.0025 late Wednesday, after U.K. retail sales in August rose by 0.6 percent from July. The U.S. currency fell against the Japanese yen to 114.44 from 116.09 late Wednesday.
The falling dollar could be good news for multinational corporations because it makes American-made goods more affordable in international markets while making it harder for foreign manufacturers to undercut domestic competition.
On the other hand, it worries the U.S. government by scaring away foreign investors who help to finance the country’s debt. As investment in U.S. Treasury securities dwindles, the government will have to pay higher rates at weekly auctions to find buyers for its bills, notes and bonds.
That eventually could push up borrowing costs for all Americans.