MELISSA BLOCK, host:
From NPR News, this is ALL THINGS CONSIDERED. I'm Melissa Block.
It was a historic day and not in a good way for the U.S. dollar. It reached a record low against the euro, and the dollar fell below 100 yen for the first time in more than a decade. There was another sign of weakness - retail sales were down in February. And despite all these the stock market closed higher.
NPR's Adam Davidson is here to explain this confusing picture. And Adam, first, what's behind the dollar's continued slide here?
ADAM DAVIDSON: What isn't behind the dollar's continued slide? There are so many things going on in the economy right now, any one of which would make the dollar fall in value. First of all, you have the Federal Reserve, the Central Bank lowering interest rates on dollars. That means investors just are not that interested in buying dollars because they are not going to get as much back for it - the interest rate is lower. Meanwhile, the European Central Bank is not lowering its interest rates, so the euro is just more and more attractive, so people sell dollars, buy euros - that makes the dollar fall and the euro rise.
In addition, there is growing fear of inflation which means that the dollar you have in your pocket today might only be worth 95 cents a year from now. So, that makes people not want to own dollars for a long time. Yet another reason to sell and buy something else - like the euro - the recession fears, this economic slowdown is yet another force. Any one of these would the dollar down but altogether it's, you know, a perfect storm.
BLOCK: Okay. Now, the U.S. government officially has what's called a strong dollar policy - they don't want the dollar to fall. What's the main argument against the weaker dollar? I think you just gave us a bunch of them right there.
DAVIDSON: Yeah. And when the U.S. government or the Treasury Department talks about strong dollar and we don't want a weak dollar, I think they're thinking long-term. They're not - I don't think they're as worried about this week or this month or even this year; they're thinking about the next few decades. Because what happens is if over, say, the next 10 or 20 or 30 years the dollar sustains a weaker level - it just keeps getting weaker and staying weaker, then basically, collectively, all of our wealth, everybody in America, all of the money we make and all of the stuff we own is just worth less. And that means that our economic might, our economic power is smaller in the globe; and it means our purchasing power is smaller in the globe.
Now, nobody is thinking the U.S. is going to stop being the dominant economy anytime soon - we're clearly going to be the dominant economy for another two decades at least - but over time it weakens our position.
BLOCK: With the average Americans - assuming we're not, say, traveling in Europe or Asia right now - would we be feeling the effect of a weaker dollar?
DAVIDSON: Not really. This is something that I have only learned recently just how much the American economy and American business have devoted - how much energy they've devoted to buffering themselves from these fluctuations. Ever since 1971 and the beginning of free-floating currencies, companies have worked very, very hard to not be affected by fluctuating currency values. So they have operations all over the world so that they can sell things in the local currency and not have to trade from dollar to euro or to yen.
Also, the average American - the vast majority of stuff we buy is either denominated in dollars or it's from a country like China that is a dollar-denominated or dollar-pegged country. Same with oil - I mean, a weaker dollar does mean oil goes up in price but most oil producers sell the oil in dollars.
BLOCK: If we're not feeling the main effects of the weak dollar right now, when might we feel them?
DAVIDSON: This is where it gets scary. Now, most likely, this will not happen - what I'm about to describe. But there is a possibility - and policy makers are very aware of it - that those forces I talked about earlier will just force a sudden and dramatic drop in the value of the dollar, just a hurdling sell-off of the dollars where it falls much more precipitously. That would bring the entire global economy to a halt. That would be scary - unlikely, but possible.
BLOCK: A cheerful note to go out on, Adam.
DAVIDSON: Thank you, Melissa.
BLOCK: NPR's Adam Davidson in New York. Adam, thanks a lot.
DAVIDSON: Thank you so much.
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