Posted on 11/16/2004 12:13:15 PM PST by demlosers
ALL BUSINESS: Steep Fall of U.S. Dollar Could Put Financial Markets, Economy in Jeopardy
NEW YORK (AP) -- The recent bounce in the stock market and the weakening of oil prices may be grabbing attention from another story that could put U.S. financial markets and the economy in jeopardy: the steep fall of the dollar.
The dollar has been struggling for almost two years, but in recent weeks its slump has been exaggerated, dropping against most major currencies and tumbling to a record low against the euro.
Should it stay on such a course, the implication extends a lot further than just bumping up the costs of vacations in Europe. And while the weak dollar is already helping U.S. exporters and companies doing business abroad, it could mean higher borrowing and mortgage costs and make everything from imported cars to toys more expensive.
The dollar hit a new low against the euro last week when it cost about $1.30 to buy one euro, the common currency used by 12 European nations. The greenback has also lost 10 percent of its value against the currencies of the United States' major trading partners since mid-May.
There are many reasons for that decline. Most recently, pressures are coming from investors' nervousness that President Bush and his administration would do little to stem the dollar's slide. U.S. Treasury Secretary John Snow on Monday said the United States would like the dollar to strengthen, but he repeated his position that international currency markets should be left to set its value.
Also weighing on the dollar are the huge U.S. trade and budget deficits.
The recent sell-off comes despite some favorable news that at other times should have helped strengthen the dollar. For one, new data on the job market shows improving employment growth, which supports the view that the economy is gaining traction.
In addition, the Federal Reserve raised interest rates last Wednesday for the fourth time in five months. The federal funds rate, the interest that banks charge each other, now sits at 2 percent, double the 46-year low of 1 percent that it was at in June.
With this weakness in the dollar, there is concern over how foreign investors will react -- particularly Asian central banks, which in recent years purchased dollars to hold down the value of their currencies and then used those dollars to buy U.S. Treasurys.
There are indications that foreigners are starting to pull back their investments, which is worrisome given that they own about 48 percent of Treasurys and 24 percent of U.S. corporate debt, according to The Bond Market Association.
In August, the most recent data available, net foreign purchases of government bonds fell 34 percent to an 10-month low of $14.7 billion. Meanwhile, foreigners sold $2 billion in stocks, down sharply from the $9.8 billion gain the month before, according to the Treasury Department.
"Their portfolios are saturated with U.S. dollars, and they need to consider what is the risk to buying additional dollars," said Bernard Baumohl, who heads The Economic Outlook Group in Princeton, N.J., and is the author of a new book "The Secrets of Economic Indicators: Hidden Clues to Future Economic Trends and Investment Opportunities."
The problem with all this is that we need that foreign money to cover shortfalls in the U.S. trade and budget deficits. And it is hard to drum up that missing cash inflow from other sources.
Consider that foreign private investors would have to increase their accumulation of U.S. stocks and bonds by six times this year from what they spent last year should the foreign central banks curb their dollar-buying, according to a recent report issued by the Federal Reserve Bank of New York.
Thus, a continual dollar decline could set off a vicious cycle of events.
It could prompt the Fed to hike interest rates to attract foreign capital, which would likely lead to a drop in bond prices. That would trickle over into higher mortgage and borrowing costs, which then could pinch corporate earnings as well as consumer spending. A weak dollar could also lead to higher inflation, which historically has been bad for stock prices.
Former U.S. Treasury Secretary Robert Rubin suggested in a speech last week that unless politicians in Washington get serious about reducing the federal deficit, an acceleration of the dollar's decline could be far reaching.
"If markets begin to fear long-term fiscal disarray and if foreign providers of the capital inflows upon which we have now become so enormously dependent share this fear and also develop a concern about our currency, then the markets may begin to demand sharply higher interest rates on long-term debt and possibly even create conditions of serious disruptions in our financial markets, with all the problems that that can lead to for our economy," he said.
Even with all those negative factors potentially at work, there is no chance that foreigners would dump their dollar-backed holdings entirely. That would drive up the value of their currencies and cause big portfolio losses.
And there are plenty of economists who believe the sinking dollar is good news. One is Stephen Roach of Morgan Stanley, who thinks that the declining dollar will provide "long overdue restraint to interest-rate sensitive and asset-driven spending of American consumers and businesses."
That, in turn, will rebuild national savings, which will thereby reduce the large current account and trade deficits.
It sounds good. That is, if it works.
Rachel Beck is the national business columnist for The Associated Press. Write to her at rbeck(at)ap.org
But how many products are not imported ? Some of the best vehicles are imports so should we be forced to buy Domestic Vehicles which according to JD POWER and Consumer Reports have quality issues. What about electronics and other items. It is getting harder and harder to purchase American made products.
I've never bought a foreign vehicle and am not worse off because of it. If you want to buy a foreign vehicle, then fine--buy it. I'm just telling you that there is nothing that requires you to do so, so don't complain about the dollar if you do.
Remember Tulip-Mania of Holland.
Remember Argentinian Peso.
Well, we are slowly and slowly progressing towards being a third world nation.
Yep I am betting on a recession 4th quarter of 2004. How long it will last who knows but it seems as though low interest rates which equaled housing boom are the main reason why the economy did well last year. Good job by the Fed disgusing other problems. Anyway it is just a guess.
"Where else will the money go........"
Remember at the turn of last century, DOLLAR took over the BRITISH POUND as the world's reserve currency.
History repeats itself.
"You won't notice it because you'll be sitting naked and freezing in your own bare home."
LOL excellent point.
"It will encourage folks to "buy American" by making foreign made goods more expensive. That sounds good."
Also could have the effects of a tax increase on Americans in general. Some products are actually made better in some foreign countries like it or not. So we would now have to choose between possibly buying an inferior product in some cases.
Point well taken!
However, if you believe in a free market, then quality may be reflected in the price of a product and competition will put pressure to equalize the weighted price of goods.
THe Dollar took over because 1) EUrope was in ruins, and 2) colonialism and the associated markets were the source of European wealth. THises are hardly the same conditions. You position rests on spurious and specious logic and od thus ill founded. Tell me, where is the money going to go if you know so much about it? THe Euro? get serious.
Nothing is wrong with buying an American vehicle. I am just stating that according to JD Powers and Consumer Reports there is a difference in resale value of Imports vs Domestic and that is not just due to the fact that Imports are more expensive to begin with. Example would be Ford Focus vs Hunda Civic which would be within the same class. Civic retains 13% more value after 3 years and is also cheaper than the Focus. Also between the 2 the build quality is worlds apart. Just an example. Not saying that all imports are better than American. Just stating that some Americans weigh alot of things when buying consumer goods and value can be found in overseas products in some cases.
Consumerism drives the economy. About 70% of all economists agree on this point. It is the basis for my position.
US consumerism will be in for a fairly radical departure from what has been the norm throught three waves of the boomers spending. The end of the third wave comes around in 2010.
Meanwhile the Asian countries are set for a wave of consumerism based on the age of their collective populations and their relatively booming wealth. I don't think the Euro will be the place the money goes either.
What makes you think that our GDP will continue to grow like it has??? Our GDP is a direct function of our spending as consumers here in the US. You are basing your view on the consumerism of the past 24 years. Regan had the benefit of being in office while the first wave of massive baby boom consumerism occured. Clintonn enjoyed the same phenomenon. Bush will sit through the last wave of that consumerism.
I am not parroting a left wing line.
What effect do you think China unpegging the dollar from the yuan will have?? Once camp says we buy from china at a discount today, the other says that china is already fundamentally bankrupt (over 50% of their bank loans are non performing). Unpegging the Yuan could go either way but my guess is that the discount we enjoy today will evaporate.
The debt now stands at 7.449 Trillion. Our GDP is supposed to be around 10 Trillion.
Things are going great now and will go great for the next four years or so. If you look at the population charts and the attendant spending it is very clear that we are going to see a nice little boom over the next few years.
When the spending comes to a rather abrupt change in pace from what we have known for 35 years, the economy as we know it today will change dramatically. That is not doom and gloom, it is just reality.
If you are correct that a basket of currencies becomes the reserve standard, what does this mean for the Dollar??
You may be correct that nobody trades currencies out four years. If I implied that I stand corrected. But if you don't think smart investors protect their positions out four or five years I would disagree.
Ping
Well, AMERICAN economy is in ruins today.
What is our economy? Wal-Mart, McDonalds, Home Depot, Lowe's, etc...........
Also, tell me if you have a stock in a company and the stock is going down and down and down, and you know it is going to go down further in future, and you know that the lenders are the one who are keeping the company afloat through their debt, HOW long before you would like to dump your stock for some investment of higher return.
If they see value, then they should not complain about the dollar. They need to factor the value of the dollar into their calculation of whether there is value.
The reality is that it's primarily the Euro that the dollar is losing ground to. It's more that the Euro is appreciating than it is that the dollar is depreciating. The EU has adopted a tight monetary policy, and that has made its currency appreciate. It's also made their economy stumble.
Have you looked at the markets recently?
"U.S. Treasury Secretary John Snow on Monday said the United States would like the dollar to strengthen, but he repeated his position that international currency markets should be left to set its value."
Deciphered this means that we will change our policy to strengthen the dollar when China floats the yuan. Until then, Europe better get used to cheap US goods in Europe and expensive European goods in the US. If Europe doesnt like it, they can call 1-800-chi-comm.
they should open up the oceans off CA again....billions of barrels just sitting there...
But Europes not famous for its stakes...
I agree there nevertheless, I lived there in 2000
Great place, but not European at all...
No offense friend, but the word is "steaks."
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