The dollar plummeted significantly again this week under renewed economic concerns.  Many forecasters have projected that the US recession is no longer pending, but might be in progress.  Financial markets will be watching closely after the end of the first quarter to see if growth has stalled.

Dollar declines have been consistent and gradual over the last several months, but lately the fall has increased in speed and depth.  Oil has set new records almost daily this week, climbing past $110 Thursday (March 13).  Gold surpassed $1,000 per ounce for the first time ever, continuing its incredible surge.

The dollar decline combined with the rapid oil rise helped contribute to Thursday’s new record national gasoline price of $3.267, followed by another jump to $3.28 Friday (March 14).  The good news is that while Americans are paying more at the pump, the excessively snowy and cold winter season has been subsiding in many seasonal parts of the country.

Many major world currencies continue to climb to new heights against the dollar as well.  The Euro is approaching $1.57, which is incredible given its position around $1.29 in late spring of 2008.  It has climbed about a dozen pips in less than one month.

The pound cleared $2.00 again and currently sits just above $2.02, after sliding back to $1.94 less than a month ago.  The pound is now just four pips off its all time high against the dollar, which it reached late last year.

Perhaps the most notable dollar move has been its dramatic fall against the yen.  The dollar dropped below one yen in early morning trade Thursday and continued lower Friday.  The greenback has seen an incredible fall against the Japanese currency after it reached a record high above 125 yen last summer. 

The yen has strengthened against most major currencies as part of carry trade unwinding, or risk reduction.  The dollar also dropped below one Swiss franc Friday and has fallen nearly 25 pips against the currency in less than a year.  The Swiss franc is another low interest rate currency associated with carry trading and unwinding.

Many people perceive a weak dollar to be inherently negative for the US and Americans.  Certainly there are disadvantages with the weak dollar.  Consumer prices, especially those from foreign imports, rise because of the dollar’s weak position in the global market.  Foreign travel is also more expensive with a weak dollar.

There are, however, several advantages of a weaker dollar that benefits many Americans.  Some US businesses benefit from increased foreign demand for products as they are more economical to buyers in countries with stronger currencies.  There is often less price pressure on US businesses as well.  Foreign travel and investment, while disadvantages for Americans, become great discount opportunities for others looking at US markets, when their countries’ currencies are strong compared to the dollar.

Essentially, the dollar weakness can provide many benefits and drawbacks.  Americans and United States companies with a global perspective with regard to business operations are in a much better position to handle a sluggish US economy and weak dollar.  These companies that can grow sales and market share abroad can more easily manage tough domestic situations.

In the same vein, domestic companies must be more creative in managing through a slumping US economy.  Consumers with a heavy reliance on foreign made goods and products must either suffer through higher prices are seek more economical buying options until the dollar returns to strength.

Ultimately, a perfectly balanced dollar that gives reasonable benefits to consumers and businesses of all types would be ideal.  Practically, however, market factors and speculation always drive the currency higher or lower in one direction, or the other.

Market Recap

Equities wrapped up an up and down week with a sharp fall Friday.  The Dow closed down 194 points to drop below 12,000 again, while the NASDAQ and S&P were down 51 and 27.  The big news on the day was that struggling financial services company Bear Stearns was bailed out by the Fed and a close rival.  Credit fears still took hold of the market.  Gas added to its record high national average while the dollar continued to fall against major currencies.

Neil Kokemuller
Friday, March 14, 2008
7:11 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.  Currency investment poses significant risk of loss.