Investment Warrior Report Archive
The Falling Dollar - What Does
It Mean? - Bill
The U.S. dollar is
falling versus other major world currencies. The dollar has fallen
nearly 25 percent in the past 18 months against a composite of other
major currencies such as the euro, the Japanese yen and the Canadian
dollar. What does this mean for our economy and our investments?
The dollar has been
made deliberately lower by our Federal Reserve through the use of
lower interest rates. Lower interest rates, along with budget deficit
spending , results in more money in the system, and hence a lowering in
the value of the currency because there is "more of it".
A weaker dollar helps the
economy by boosting U.S. exports, because American-made goods become
cheaper in terms of foreign currencies. A lower dollar will also mean
higher prices domestically for many imported products. Higher-priced
imports will help American producers, , though some U.S. firms may raise
their prices and match the market to take more profit. The end result:
more U.S. jobs but higher prices at the checkout counter, and an
increase in the inflation rate. Gold (which actually never changes in
value, but reflects the value of the currency it is quoted in)
increases in dollar terms when the dollar falls in value.
One currency that the
dollar hasn't fallen against is the the Chinese yuan. China, which is a
major exporter to the United States, keeps its exchange rate fixed at
8.3 yuan to the dollar. For this reason, the competitive balance between
U.S. workers and Chinese workers will not change, in spite of what
happens between the dollar and other currencies. In fact, the falling
dollar has helped Chinese exports to Europe and other countries.
Another factor in the
dollar fall is that foreigners are investing less money in the United
States. Foreign firms aren't building factories here or buying into
American companies at the same pace as they did during the 1990s.
Foreign investment in U.S. stocks has dropped dramatically, and
purchases of corporate bonds are off as well. On the other side of the
coin, investments made by Americans in international stocks, actually go
up, even if the foreign market just remains in a standstill. That is
because when priced in dollars, the value of foreign stocks go up
even without share appreciation.
The movement of
currencies happens in broad based secular movements lasting several
years. Imbalances tend to work out over time. It is likely that Europe
will soon be aggressively lowering its interest rates and devaluing its
currency to protect its markets very soon. So although the dollar has
fallen, it does not represent the end of the dollar as a major currency,
or the end of the American "Manifest Destiny".
MORE THAN EVER, REMEMBER AND COMMIT TO STRATEGY, PATIENCE,