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
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.
So what is it? Either a weak dollar leads to the money supply tightening, which keeps inflation in check? Or a weak dollar causes inflation? Which the article gives no inflation scenario or explanation.
Yeah, that about cover it. LoL!
Gee... have to cancel my vacation in Europe (sarcasm)
I won't be able to buy that BMW. Darn!
The drop in the dollar is a good thing.
Precisely. Just don't buy anything that's imported, and you'll never even notice the decline of the dollar.
Clinton loved the strong dollar. That about sums it up.
This is the newest anti-bush smear - there is absoltuely nothing to it.
Says it all. Probably a close associate of Paul Krugman.
The simple fact is that the US acknowledged debt is very close to if not already equal to its GDP.
When that happens your currency joins the ranks of the Turkish and Italian lira.
A weak dollar leads to a tightening of the money supply because a higher interest rate must be paid to those who would buy treasuries. Why would anyone loan you money at a rate less than a treasury?? Answer: They won't. So less money will be sought after for loans because the cost of borrowing goes up.
A weak dollar does not cause inflation. Inflation is a result of a weakened dollar. If it now takes $1.30 to purchase the same thing from Europe that you bought for .90 cents a couple of years ago then you can see how it takes more dollars to buy the same thing. That is inflation.
A currency's prime rate is a direct reflection of the purchasing power of the currency. If the rate is low, the currency will buy a lot. If the rate is high, the currency will buy less.
The dollar is going down the tubes. The final over the cliff plunge will occur in about four years. The smart money is positioning for this now. It will only get worse.
Analysis:
Debt is Dumb, due to an overvalued dollar US GOvernments and US INDIVIDUALS have been overspending at record rates.
Dollar value will decline, raising interest rates and increase debt pay off and savings... leaving America in a much better position long term.
Right now the typical household in america saves at -2.2% of their income.... a shrinking of the availability of debt is NOT a bad thing.
actually, i think the foreign money has nowhere else to go. french and german innovation? pour more money into china to build yet another steel plant? pour money into India?
just wait for the nano-technology boom to hit -- the US will be the leader of that wave as well...
It will slow the outsourcing of jobs to overseas locations. That sounds good.
It will dramatically threaten China's economic growth. That sounds good.
It will make Boeing more competitive with AirBus. That sounds good.
It will make foreign oil and natural gas more expensive and put pressure on domestic drilling and exploration. That sounds both good and bad depending on who you are and how much you like SUVS or drilling in ANWAR.
It will screw up the Canadian economy and make Canadian perscription drugs cost more. That sounds both good and bad, depending......
It will encourage folks to "buy American" by making foreign made goods more expensive. That sounds good.
It will mean that all those immigrants who work in the USA, but send money home to another country will be sending less buying power overseas to Mexico, and various other Central American countries and hence there will be less of an attraction to illegally move to the US. That sounds good.
It means that imported French wines will be more expensive and domestic wines will take their place, thus harming our good friends over in France. That sounds good or bad depending.......
Yes, there was a lot left out of the story.
Oil's the only thing you can't really do without. Get it from Texas.
I think some of the dollar devaluation and inflation are part of a carefully thought out strategy to deal with the entitlements "wall" that every western democracy faces. Japan, Western Europe, and the U.S.A. all face the retiring Boomers and the resulting demand on medicare/SS that grow to consume the entire budget. A purposeful policy of inflation can chip away at the drain on the productive economy. Be warned, that SS check won't even buy groceries a few years hence.
It is abolutley silly to think that the dallor is going the way of the Turkish currency. Wher on earth will the money go. CHina will most likely hit a high water mark in a vouple of years and then steel down to work out their problems. We heard all if this before during the Reagan years (remember we devalues 40+% against the DM back then.) It was rubbish then and it is rubbish now.
Nonsense. Embryonic research may happen elsewhere (but mayne not given some on the innitiatives in CA, NJ, etc.) but all of that may lead to a dead end. THis whole business is overhyped due to the fact that Bush came out against it. IIf bush had banned "Yellow hat research" the press would be taking about the perils f foreign Yellow hat research Stem cell research is the US will be just fine. You should have a look at the sort of resources we spend of medical and biological research - we spend far more than anything else. Say out of the US markets if you like - the markets are not agreeing with you right now.
THis all is just more MSM BS. We have the best economy in the world and it will just get bette, so lomg as we keep the, Democrats out of power.
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