Greenback Blues.(The Talk of the Town)(U.S. dollar)

Few phrases seem more quaintly outmoded these days than "sound as a dollar." Once the embodiment of American financial strength, the dollar has spent the past five years getting sand kicked in its face by the world's currencies, and in recent weeks, thanks to the Federal Reserve's surprisingly big interest-rate cut, its decline has accelerated. A euro, which you could buy for eighty-six cents in January, 2002, now costs $1.40, and the Canadian loonie, once an easy object of derision, is as valuable as a dollar. In 1922, Ernest Hemingway wrote an article explaining how to live in Paris on a thousand dollars a year. These days, an American in Paris is lucky to spend a thousand dollars a week.

Most Americans, of course, don't worry too much about the price of dinner at Taillevent. But the dollar's latest drop, in the minds of many market observers, is bad news even for Americans who stay home. We are, after all, hooked on imported goods--in 2006, the U.S. paid $1.8 trillion for foreign imports--and a weaker dollar should, in theory, make them more expensive. But, despite the daily headlines, there's little evidence that the situation has provoked anxiety. Indeed, some in Congress are trying to pressure China to revalue its currency upward, which would make the dollar even weaker.

How can Americans, with their love for foreign goods, remain indifferent to the dollar's drop? Mainly because so far it has had surprisingly little impact on our standard of living. Inflation, for instance, has remained solidly under control--the economy's core inflation rate was about two per cent over the past twelve months, and it hasn't been much higher than that in recent years. Even more surprisingly, the prices of imported goods have gone up only slightly. If you travel abroad, you feel like a pauper. Yet if you stay at home you'd be hard-pressed to notice any difference from a decade ago, with the notable exception of the price of oil.

In part, this is because exchange rates move far more quickly than real-world prices, which tend to be what economists call "sticky." It's a hassle to print new menus or product catalogues, or to go back and re-tag every item in the store, and it also confuses and alienates customers. So companies tend not to change prices all that often. They also use futures markets to hedge against currency risk, which reduces the need for price increases. And China has played a huge role. Although the dollar's value has plummeted against the euro, it has fallen much less against the Chinese yuan; that's because the Chinese government continually buys dollars to prop up their value and insure that Americans can keep buying Chinese exports, which have been fundamental to China's economic boom.

But what's most interesting is that ...