Dollar At Record Low Against The Euro

Anybody else read The Onion? Check out this week’s Infograph:

http://www.theonion.com/infograph/index.php?issue=4049

Absolutely hilarious. What are the reasons for the currency’s decline? My favorites:

  1. Currency markets hate freedom.
  2. Some experts think it may have something to do with the fact that the U.S. has a shitty economy

It has nothing to do with having a shitty economy. It has to do with buying more value than we make.

And the fall of the dollar, provided it is a soft fall, is a part of the solution. It will make U.S. exports relatively cheaper for Europeans (and Asians if they will let their currencies float – but not likely), which will drive down the current accouts deficit.

Cutting domestic spending to shore up the budget deficit – another matter entirely from the current account deficit – will also help. The proposed budget indicated Congress was committed to the idea of restraint, as growth in discretionary spending was set to rise at a level significantly below projected GDP growth.

But aside from that little outburst on actual dollar decline, it was a funny article.

About 98% of my clients are farmers. Cotton farmers. The week dollar is one of the best things that can happen to a cotton farmer. Why? The weaker our dollar, the more attractive it is to buy american cotton.

I stand to have a banner year in 2005.

Besides - the weak dollar HAS to be hurting the Euro-markets, else they wouldn’t be raising such a stink over it.

But I could be wrong.

A lot of people around the world are saying that a weak US dollar is detrimental for the world economy. This isn’t a field I personally am knowlegable in. Can someone explain why?

When the dollar is stronger against the rest of the world’s currencies, it is cheaper for the U.S. to buy more stuff from other countries.
When we buy more stuff from other countries, it makes their economies stronger.

Conversely - when the dollar slides against the other currencies, we don’t buy as much of their stuff - because it is more expensive - and their economies go in the crapper.

Rainjack,

Excellent stuff and I hope it is a banner year for you.

Also, one of the great ironies of the weakening dollar was the the EU saw their rising Euro as a source of strength and pride as the dollar slipped past parity. It was rather a pissing contest about the ‘strength’ of the EU emerging as the new dominant economic zone and the the dollar yielding to the Euro’s power.

But, of course, Europe is heavily dependent on exports to the US to keep its economy on track. Europe’s lack of internal demand is compensated by the US’ demand to import like there’s no tomorrow.

When that dollar slides, European bureaucrats cheer and beat their chest, but European businessmen wring their hands and weep.

Be careful what you wish for.

There is an interesting article in this week’s Economist on the issue: http://www.economist.co.uk/displaystory.cfm?story_id=S’)(<(Q13’%23P"%24 &CFID=44663847&CFTOKEN=5e74f4d-ddda4e22-c110-426d-8e8b-701de7bb82e8&sponsorTranMode=UK
Unfortunately it is premium content on the website, so I can’t copy it here.

In essence (and if I understand it correctly) it states that the falling dollar has a good effect on the US’s economy (solving many of its problems), but if it goes to far it might create a huge problem for the US:
“A fall in the dollar sufficent to close the current-account deficit might destroy its safe-haven status. If the dollar falls by another 30%, as some predict, it would amount to the biggest default in history: not a conventional default on debt service, but dafault by stealth, wiping trillions off the value of foreigners’ dollar assets. The dollar’s loss of reserve-currency status would lead America’s creditors to start cashing those cheques… American bond yields (long-term interest rates) would soar, quite likely causing a deep recession.” (Economist, 04-10/12/04, page 9)

Any thoughts on that?

Makkun

The falling dollar is a double-edged sword. It is beneficial to our exports, but it makes our money worth less, and makes imports more expensive to us.

I don’t think the dollar is going to slide much more then it has. I believe it is bottoming out, and the government does not see as much benefit from keeping the dollar so low. (It is a manipulated commodity.)

A lot of people don’t understand the purpose of trade. Too many think it is to get money, but that is not the reason for trade. It is actually to get stuff.

Sometimes markets are set up where one country can produce an item cheaper then another, while the other country can produce another item cheaper then the first. It actually makes sense for each country to focus on what they can produce best, and each prospers from the larger supply of cheaper items.

Another thing people mistakenly obsess about is the trade deficit. Unfortunately I don’t know how it is figured presently, but I do know that in the late 80’s it was not very accurate by any means. Various forms of trade were under the radar. For example books that were sent overseas, and printed there, produced a profit over here, but did not affect the trade deficit.

The same was true with software. It was funny that the hardware was made in Japan, which was included in the trade deficit, but all the software was not, and it was mostly produced here.

I doubt things have changed enough to cover everything as of yet.

In the long term, the euro will not stand as strongly against the dollar if only because of the strong socialist ties in Europe. There is political pressure to change from the Dollar to the Euro as the main form of money worldwide, and it is looking like the most successful so far, but it has that inherent weakness that it cannot overcome.

One of the reasons the dollar is so cheap is because of low interest rates, and Greenspan will be tightening interest rates soon. But I expect him to do so more weakly then he probably would have just because of the national debt. It the interest rates get too high, then financing the debt becomes too much of a burden on the government, while too low, and people won?t invest in our debt.

Once you see the dollar start to climb, you might want to reduce foreign investments, or look at them more closely.

One thing that the article forgot to mention is that the dollar has been overvalued for several years.

During the bubble of the 90’s, the dollar soared in value. After the crash, the dollar remained steady - never really coming off highs that were artificially lofty.

It would be my contention that the the dollar is still a little over valued, and has farther to fall before leveling off.

The dollar will still be the index currency, the U.S. economy will still be the yardstick by which all other nations gauge their power, and we will still be the largest consumer on the face of the planet.

All the doom and gloom coming from the East side of the Atlantic is a lot of wishful thinking on the part of those that would love to see us stumble.

From the WSJ:

Doing the Math

So, who wins and loses with a weak dollar? Here is a quick cheat sheet on the plusses and minuses for individuals, companies and economies:

Individuals

  • (losers) U.S. consumers: Fewer bargains, as foreign-made goods imported to the country cost more. The cost to make the goods overseas is the same, so in order to maintain profit margins, companies may charge more in the U.S. dollars to make up for the weaker exchange rate with foreign currencies.
  • (winners) Overseas investors: One of the few groups that benefit from a weaker dollar. For example, as the euro goes up against the dollar, an American trader selling shares in Milan that also have risen will gain not only from the share-price appreciation, but also by getting back more dollars in the exchange from euros.
  • (losers) American travelers: The weak dollar means that when Americans overseas exchange their money for foreign currency, they won’t get as much. So $100 will only get you about ?77.5; two years ago, the exchange rate was almost even. This makes everything from a luxury hotel in Paris to a fine meal in Rome seem even more expensive to travelers using dollars.

Companies

  • (winners)Manufacturers in U.S.: They have a competitive advantage – they don’t have to lower prices on exports to boost sales and capture market share overseas. Just by keeping prices steady, they benefit because the weak dollar means foreign buyers won’t have to pay as much in their respective currencies. The profit margin on each unit is constant, so earnings go up.

  • (winners) U.S. companies abroad: The weak dollar pads profits for U.S.-based companies with big operations overseas, such as Coca-Cola or McDonald’s. A Big Mac in France always is charged in euros, so revenue doesn’t change based on currency fluctuations. But when McDonald’s reports earnings in dollars, a euro translates into more, providing a boost to overall revenue and profits.

  • (losers) Overseas companies in U.S.: For non-U.S. companies with operations in the States, the earnings impact is reversed. Say Sony sells a $1,000 Trinitron TV in the U.S. When the company converts the transaction from dollars into yen, it comes to about ?105,000. That’s less than it would’ve been two years ago. Back then, the same $1,000 TV amounted to sold for roughly ?125,000.
  • (winners) Wall Street firms: Institutional investors that trade and manage currencies are uniquely affected. The financial-services industry benefits when the dollar moves in a single, steady direction – regardless of up or down. A steady move provides an incentive for firms to hedge or manage currency-related risks. Although, if the dollar were to fall precipitously, the resulting instability would rattle markets elsewhere.

Economies

  • (winner) U.S. economy: The weak dollar can help narrow the trade gap – a sensitive political issue, whether good or bad for the economy. It also can give a shot in the arm to stagnant growth by giving U.S. companies leeway to raise prices, and boosts demand for exports overseas. The net result can be new hiring, business investment and, eventually, accelerating growth. Ultimately, though, inflation leads to higher interest rates, which damps economic growth.
  • (losers) Overseas: The weak dollar makes international companies’ goods suddenly seem more expensive to Americans, who account for more than 30% of global consumption. If U.S. buyers snap up fewer imports, those overseas countries’ economies end up taking the hit. China has long withstood eliminating its peg to the dollar, which has helped it rack up a huge trade surplus with the U.S.
  • (winner) U.S. tourism: The industry benefits doubly: More Americans vacation in the U.S. to avoid higher costs abroad, while those from overseas come to the U.S., where their currencies command more power. The Travel Industry Association said in its annual forecast that it expects overall traveler spending by domestic and international visitors in the U.S. to increase 6.9% by year end to nearly $593 billion, up from $555 billion in 2003. An additional 5.3% increase in 2005 will bring spending to $624 billion, the association said.

Some excellent summaries from the T-boys. My question was succintly answered, even if most of you are right wing bastards (that explains why you know so much about money, I guess!)