Weak US dollar impacts global perspective

By Pete Southern in LiveWire Economics Blog | January 18, 2008 10:11 |

The US dollar has remained somewhat range bound against the Euro and Pound as of late.  It currently (January 17) takes $1.4628 to by one Euro, still holding a couple pips under recent record highs.  The dollar remains relatively strong against the Pound with $1.97 fetching one Pound.  The dollar is currently ten pips stronger than its lows against the Pound.  Britain has had some economic challenges of its own of late, which have weakened it against the Euro and the dollar.

 

The dollar has continued its steady fall against Asian currencies, most notably the Japanese Yen.  One dollar is worth 106.50 Yen at this moment.  The dollar is in the midst of another move in its downward progression against the Yen that has seen it fall almost 20 pips in the last six months from record highs above 125 Yen per dollar.  While the weaker dollar certainly is a factor in this move, the Yen has come on strong against European currencies and other higher interest rate currencies with carry trade risk reduction, tied to financial market tumbles.  The Yen has moved an incredible 40 pips against the Pound during the same period.

 

As many Americans and economists watch bad news continue to come in about the US housing and mortgage markets, along with the retail environment, financial markets steadily fall.  With falling financial markets, currency investors look to reduce their risk by pulling out of carry trades, which leverage interest rate differential for consistent gains.

 

Many economists speculate the dollar collapse has only just begun.  President Bush today announced support for a temporary economic stimulus package designed to help keep the country out of a possible recession.  The sound of recession does not create a melody that inspires people to invest in the greenback.  In spite of the fact that gold prices have fallen back below $900 to just below $880 per ounce, speculators are still showing a strong desire for the precious as a safety net for the falling dollar and sagging US economy.

 

In spite of the fact that many Americans do not sense a direct impact from a weak dollar, there are many impacts than can result from a continued weakness.  For Americans that enjoy overseas travel for business or personal reasons, a relatively weak dollar can make this travel more expensive.  Mortgage rates, job markets, consumer goods, and other products are heavily impacted by the position of the dollar.  If the dollar is weak, it has less value in the marketplace, meaning Americans will have to come up with more dollars to buy products.  In turn, salaries and wages often do not adjust quickly enough to take into account this increase cost of living.

 

Interestingly, the Bush administration has historically maintained a generally strong dollar policy, believing a stronger dollar is good for the US in terms of its benefits to businesses and consumers.  However, with focus on housing and mortgage, and the economy, the administration has commented little on the decline of the dollar.

 

At some point in the near future, many world financial analysts believe the International Monetary Fund or Central Bank leaders may step in to rescue the dollar.  In spite of some economic advantages to foreign countries with a strong currency ratio against the dollar, most of the world relies on a healthy dollar as part of an overall positive global economy.  More specifically, much of the world carries significant US dollar reserves as part of their reserve holdings for security.  Therefore, it is in the best interest of many countries in the world to not have the dollar see a dramatic fall.

 Market Recap 

Equities markets were down again Wednesday.  The Dow dropped 34 points, with the NASDAQ lower by 23 at close.  The biggest economic news of the day was a huge inflation jump in 2007 lead mostly by gas and food prices.  Fed reports also showed several indicators of a weakening economy, prompting recession fears to swell.  Thursday was a dark day on Wall Street with the Dow of 300 points, to close at 159.  It is hard to believe the Dow was above 14,000 only months ago.  Steep drops in manufacturing were the spark plug for the fall.  Merrill Lynch added a poor fourth quarter report to the mix.  IBM made a strong forecast for its earnings.

 

Neil Kokemuller

Thursday, January 17, 2008

6:00 PM EST

 Neil Kokemuller is an Associate Professor of Marketing at Des Moines Area Community College in Des Moines, Iowa, USA.  He has a MBA from Iowa State University with a specialization in marketing. Please note:  The information provided in this article is intended for informational and entertainment purposes, and not as advice for financial decisions or investments.  Actions taken on the basis of the information shared is at the sole risk and discretion of the individual.

Pete Southern About Pete Southern
Pete Southern is an active trader, chartist and writer for market blogs. He is currently technical analysis contributor and admin at this here blog.


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