The US dollar is cascading downward. This move is causing banks, especially central banks, to shift reserves out of the dollar into the euro and yen.
A Bloomberg survey reports that policy makers boosted currency holdings by $41.3 billion dollars in the last quarter. Nations reporting currency breakdowns put 63% of this new cash into euros, and yen. The dollar's share fell to 37% from 63% in 1998.
How is this affecting the dollar on the commodity futures markets? The dollar fell to 75.77 last week on the Intercontinental Exchange Inc. (ICE). This is the lowest level since March 4th, when it was at 89.62 (The dollar is traded against a basket of currencies.)
Treasury Secretary, Timothy Geithner, is spouting a strong dollar policy, yet in reality we are letting the dollar drift lower. Why do we have this double standard? The answer is that a weaker dollar stimulates our exports. With our economy in the doldrums, this is one way to stimulate business
Foreign countries are complaining that the lower dollar is affecting their exports to the US. China's president, responding to the weak US dollar said: "Major reserve currency issuing countries should take into account and balance the implications of the monetary policies for both their own economies and the world economy with a view to upholding stability in international markets."
On the negative side, the weaker US dollar is causing a spike in world commodities. Major commodities like oil, grains and gold are all trading higher today. This of course is inflationary. If raw materials prices go higher, then finished product prices will also go higher and the price changes will be passed on to the consumer.
Another negative is that the euro is getting much stronger which is making it more difficult for European countries to export their goods.
Some analysts believe that the dollar decline will reverse itself when the Federal Reserve begins raising interest rates.
There is a present danger that all of these machinations will get out of hand. Countries like China, Japan, Russia and India are increasing their reserves. The could further intensify the problem by shifting a larger percentage of their reserves away from the dollar.
The strength of the dollar is key. Watch the level of dollar trading in the coming weeks. It will determine whether or not the seeds of inflation are taking root.
Do you believe that the dollar will still trade lower?
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Reader Comments (Page 1 of 1)
10-12-2009 @ 11:46PM
ij70 said...
It will trade even lower.
We need jobs. How can we get jobs? Raise tariffs on imports, lower value of our currency or do both of those things.
If we raise tariffs, the wogs are going to complain that we are implementing protectionist economic policy. (Duh!) It is too obvious.
However, if we allow the dollar to float down... then we can claim that it is not direct result of our government policy, maybe a secondary or tertiary result and that mostly global economy is to blame. :-)
Do we, the Americans, really care about the fact that Euro is getting stronger and European products become too expansive when imported to US? I don't.
The more interesting aspect of the weaker dollar is the commodity prices. Since weaker dollar promotes our export and reduces our import, we are going to need raw materials, commodities, to make stuff that we are going to export. Do we have coal? Yes. Do we have oil? Yes. Do we have various ores? Yes. Are we feeding China with our soy beans and wheat? Yes, we do.
Bottom line. Dollar is at about 76 points. It has another 10 points to go.