Greenback Gloom (Not?)

Investor's Business Daily ^ | 29 Novmember 2006 | Staff

[shrinkermd]

No one, of course, wants to see the dollar in a free fall. And no question, it has retreated against some currencies. But worried? We aren’t.

The dollar isn’t weak at all. Indeed, it’s trading 19% above its level in the mid-1990s, smack in the middle of the Internet boom. True, it’s come off the highs it set in early 2002, when foreign investors still spooked after 9/11 were desperate to invest in a safe haven with sound markets, the rule of law, low interest rates and fast economic growth. That pushed the buck up sharply.

...The other is that, contrary to lots of current market reports, the U.S. currency isn’t “nearing new lows” at all. The reason is simple: Many people focus on very narrow measures of the dollar’s value — like the dollar-euro, or the dollar-yen, or even the dollar-yuan. By those gauges, yes, the dollar is hitting new lows or close to them.

...But this is an error. Far better is looking at the dollar against a broad market basket of currencies weighted for the amount of trade they do with the U.S. When you do, you see that while it’s true the greenback has slumped in recent months, over the long term it’s not down at all. And why has the dollar fallen recently?

[shrinkermd]

Answer:"...The U.S. jacked up its fed funds rate 17 times since June of 2004, to 5.25%. Now the bet is it will soon start cutting rates. Meanwhile, the European Central Bank has boosted rates five times from 2% to 3.25% — and the bet is it’ll keep going. The shrinking difference in interest rates will pressure the dollar until the ECB stops tightening

"...But as Bank of America economist Joseph Quinlan notes, the world is addicted to exporting to the U.S. Last year, total world exports hit $12.6 trillion. The U.S. took in 16% of that total, with just 4.5% of the world’s population. We’re the world’s consumers of last resort. A plunging dollar could change that. So, for now, that makes a collapse in the dollar unlikely. It’s not that we can’t afford it. It’s that the world can’t.

[Brilliant]

A falling dollar ought to be good for exports and bad for imports. So it may be time to invest in companies that face significant import competition.

[edcoil]

"trading 19% above its level in the mid-1990"

Drudge is running headline of dollar at 15 year low.

While this is excellent for exports, it does cause problems for importing and since our government does not allow us to make much any longer this will cause us a few problems.

[OldFriend]

Drudge goes for the tabloid headline, as always.

[moonman]

Now that the world knows that Democraps control the purse strings, that alone scared 15% off the dollar.

[SomeoneNeedsToSayIt]

Buy when everyone is selling and sell when everyone is buying. Don't put your position on in one purchase. Scale in a little at a time.

The dollar sure looks like a buy at this point.

[Terpin]

I always get confused by the dollar swings. With the dollar getting weaker, doesn't that mean that U.S. goods will be cheaper for foreign buyers than they were before? If so, isn't the weak dollar a good thing for U.S. manufacturers and the U.S. hospitality and tourism industries? Or do I have it backwards?

[Sender]

I am notoriously ignorant in financial matters, particularly so in world currency markets. It's all Greek to me.

However my gut feeling agrees with the idea that since the world depends on us to import everything they make, that simple fact will tend to prevent a free fall.

Even countries such as China who might secretly hope to see the downfall of US power can ill afford to lose all their consumers. The Chinese economy would follow ours.

Extreme dollar pressure could be a good thing in the long run. It might even cause rethinking about having production in China vs production in USA.

What goes around comes around.

[shrinkermd]

Drudge's headlines are probably on the basis of Yen, Euro or a few currencies. This article is using the dollar index which is a bundle of currencies. I wish I knew how to post the graph that illustrates this point.

Probably, a currency free measure of the dollar value is the price of gold per oz. It now centers on $600; it centered around $350 per oz a few years ago.

[edcoil]

Has a lot to also be due to foreign debt. If they buy you cheap, if they lower the value of your currency, it makes it more expensive to pay them back.

[DManA]

I think you are on the right track. Currencies vary relative to each other based on expectations of inflation. The market is betting the crats will pursue inflationary policies.

if they lower the value of your currency, it makes it more expensive to pay them back.

[Thermalseeker]

A falling dollar ought to be good for exports and bad for imports.

I said essentially the same thing on another thread yesterday or the day before and was flamed mercilessly. Lots of "doom and gloom" goomers out there.....

[Brilliant]

There are challenges that will arise from it, obviously. Most significantly, we'll pay more for imports, and that means oil.

But there is a silver lining even so.

[2001convSVT]

You are right. A lower cost dollar should mean demand for US exports should pick up.

The other side of this coin is that consumers will be paying more for imported goods, of which there is a lot because of all the overseas outsourcing that US has been doing over the last 3 decades.

Overall, it will hit the US consumers pocket until American manufactures can gear up to fill lower cost product demand.

[AmericaUnited]

Now this is a reasonable and well informed understanding of where the dollar is.

[GodGunsGuts]

The dollar has been falling for years against our major trading partners. I have a feeling IBD is painting an overly rosy picture because they know what will happen if the dollar closes 3% below .80 for more than a few days.

This is what's pushing the dollar down, and will continue to push it down, unless we, the American people, take corrective action:

And let me close with the words of a few good men:

"We hear sad complaints sometimes of merciless creditors; whilst the acts of merciless debtors are passed over in silence." - William Frend, 1817

"I place economy among the first and most important virtues, and debt as the greatest of dangers to be feared." - Thomas Jefferson"

"The decline of great powers is caused by simple economic over extension." --The Rise and Fall of the Great Powers, by Paul Kennedy

"There is no means of avoiding the final collapse of a boom brought about by credit (debt) expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit (debt) expansion, or later as a final and total catastrophe of the currency system involved." - Ludwig von Mises

No generation has a right to contract debts greater than can be paid off during the course of its own existence." - George Washington to James Madison 1789

[Paul Ross]

A falling dollar ought to be good for exports and bad for imports. So it may be time to invest in companies that face significant import competition.

This would be normal trade theory. Unfortunately, it is less than likely. We have huge trade imbalances partially because of the trade barriers imposed by China, the Pacific Rim, and the EU. They deny it of course.

But nonetheless real.

If things get really bad...they likely will make those barriers even higher. So as the dollar falls, in part because of their predations...they likely will react with even more aggressive barriers to keep the U.S. from redressing those imbalances.

Look at how the EU has reacted to being busted about its Airbus subsidies...they have threatened open trade war.

Why this should be so much worse than their thinly-veiled trade war is not explained.

Anyways...nothing is likely to happen at the WTO where the EU outvotes us 15 to one....

Yep. The WTO is to "Free Trade" what the UN is to "World Peace".

Time to get out of both.

[Brilliant]

The biggie, though, is oil. We can make our own computers, autos, etc. We simply choose not to since we can buy them overseas for less.

But we've gotta buy our oil from the Saudis, at least until the American people demand that Congress permit more drilling, and that ain't gonna happen anytime soon.

[Paul Ross]

The biggie, though, is oil. We can make our own computers, autos, etc. We simply choose not to since we can buy them overseas for less.

Except...those computers and autos etc....were how we were formerly able to pay for the oil. We had a trade surplus in those same manufactured goods. Now we have blithely assumed that manufacturing is of no account... our creditworthiness will go the same way. As the combined deficits of energy and manufactures drain our capital.

[Toddsterpatriot]

Now we have blithely assumed that manufacturing is of no account..

LOL!