US dollar plunges, tips deflation fears Europe's way

AFP ^ | 19 May 2003

[T. P. Pole]

The dollar tumbled to 115.13 yen from 115.90 on Friday.

115.13 to 115.9 is a tumble?

[headsonpikes]

Let paper chase paper; buy gold.

[Destro]

So if the dollar deflates, what does that mean to the purchasing power of the dollar? difference with inflation is?

[BlueNgold]

Does anyone that maybe knows more than me about this particular subject think this is a lot of 'Henny Penny'?

[sourcery]

FYI

[Timesink]

115.13 to 115.9 is a relatively big shift for a single day's trading, but not a particularly big deal. There are plenty of days the Dow goes up or down 200 points or more, and then is right back where it started two or three days later.

Financial reporters just aren't very good at looking backwards beyond yesterday's trading. If stock X tumbled from $15 to $5 yesterday, but jumped from $5 to $6.25 today, they'll report on how "stock X was the number one gainer on the Dow today..."

[Ford Fairlane]

now i know why the market tanked today

[AntiGuv]

The dollar would undergo depreciation not deflation. The purchasing power would obviously be reduced through a period of hyperinflation, followed by a slide into deflation. For some reason, a lot of people seem to think that the two (currency depreciation; economic deflation) cannot take place simultaneously or sequentially, although history proves them otherwise.

[Timesink]

So if the dollar deflates, what does that mean to the purchasing power of the dollar? difference with inflation is?

Deflation, in and of itself, is nothing more than prices going down instead of going up. So your dollar's purchasing power (in this country, anyway ... deflation and currency fluctuations are different animals, though the existence of the former will certainly affect the latter) will technically go UP.

The problem is that our entire system of capitalism requires prices to rise in order for the economy to grow (within reason, of course. As long as your salary increases in line with inflation, all is well). You invest in something, you expect the price to increase; that's how you become more wealthy. So if company Y, which employs you, starts turning in crappy quarterly earnings reports because deflation is forcing them to charge less for all their products, eventually they're going to have to cut your salary, which pretty much wipes out your extra purchasing power. And that, of course, starts a vicious circle, since people who have their salaries cut buy less stuff, forcing companies to lower prices even more ... lather, rinse, repeat.

This is how depressions can get started. (Emphasis on CAN; this isn't exactly 1929.)

[AntiGuv]

To be sure, depreciation followed by deflation would be the likely consequence taking into account the scenario described above and the current economic milieu in general. I'm definitely not suggesting that deflation inherently follows currency devaluation (that would be an absurd statement) but that it has done so and can do so under particular circumstances.

[MD_Willington_1976]

Here's one that really sucks...Barf Barf Yack....

Monday, May 19, 2003
1 US Dollar = 0.86333 Euro
1 Euro (EUR) = 1.15830 US Dollar (USD)

This one particularly sucks for me since I pay for my student loans with real money (US$$ = real money)..

Monday, May 19, 2003
1 US Dollar = 1.37000 Canadian Dollar
1 Canadian Dollar (CAD) = 0.72993 US Dollar (USD)

[montag813]

Let paper chase paper; buy gold.

Indeed. Gold (GCM3) up $10 today...a huge move for the futures.

[Bogey78O]

Yes because you're looking at it from the yen's perspective. Now you can buy more dollars with the same amount of yen.

[snopercod]

"What the United States has made clear is that they are not going to undertake any efforts to try to defend the currency..."

I've never really understood that kind of hubris. What can the feds really do to "defend the currency"?

[DoughtyOne]

Foreign investments in 2001 were $50 billion dollars. In 2002 they were about $28 billion. For years we have been told that the strong dollar haven for foreign investers was the only thing that kept us afloat servicing our $5.5 trillion dollar deficit. If foreign investers find the sagging dollar a poor haven, haven't we shot ourselves in the foot to stave off deflation? I'm certainly no expert on any of this, but I do not like to see open season on the dollar. I'm not convinced a weaker dollar is in all ways a good thing. I don't think it is in all ways bad either, but it isn't a zero sum gain in my opinion.

[Paraclete]

The problem is we're running out of room for Fed policy to have much effect. Are they going to charge negative interest rates? Pay us to spend money?

We may be entering uncharted territory by modern standards.

[Tunehead54]

I've never really understood that kind of hubris. What can the feds really do to "defend the currency"?

---

The US would buy Dollars in international transactions to keep the price of the dollar up. I believe this is the technique.

Buying dollars with other currencies bids up the dollar value and lowers other currencies. Sometimes nations will join together to buy (support) a nation's currency to help prop up their economy.

[AmericaUnited]

But "in Europe, it has the opposite effect," he added.

Gee, that's too bad we happen to be screwing the Eurotrash... or should I say "putting the economic thumbscrews" on them.