is the US dollar a sinking ship?

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Is the U.S. dollar a sinking ship? By The Christian Science Monitor
Its decline to a nine-year low is affecting everything from the price of goods at Wal-Mart to the vigor of Europe's economy.

The sinking U.S. dollar in recent weeks has raised what is suddenly a top concern from Washington to Berlin and Beijing: Is America's currency undergoing a benign adjustment or a precipitous plunge? So far, the dollar's slide to nine-year lows doesn't reflect panic. But some analysts say a run on the dollar is possible. And even an orderly drop could affect everything from mortgages to prices at Wal-Mart.

The good news for Americans: It's getting easier for manufacturers to sell products overseas, and more likely that tourists from Germany will flock to U.S. national parks. But the downside could be significant. America, the world's leading importer of goods, is now buying them at higher prices. And if the dollar's dive makes foreign investors wary, U.S. interest rates may have to rise to attract buyers of federal debt.

More broadly, it's a shock to the global economy. At a November meeting, officials from the Group of 20 industrial and major developing countries called for the United States to cut its federal deficit, which is seen as a key factor in the dollar's fall. "There's a lot of speculation," says Michael Schubert, an economist at Commerzbank in Frankfurt. He sees some signs of a "herd instinct" developing.

Less hope after election
The dollar is now down about 50% against the euro since October 2000 and recently hit its lowest level since 1995 against a basket of foreign currencies. While the shift isn't entirely new, it has accelerated since President Bush's re-election. Some observers say the timing reflects concern that Bush -- with his emphasis on tax cuts -- won't be able to rein in record budget deficits. "The general perception was that under the Bush administration there would be less concentration on tackling the two deficits," says Richard Reid, European economist for Citigroup, the world's largest financial institution.

He was referring to the $412 billion budget deficit and the approximately $600 billion trade deficit the United States ran in 2004. A trade deficit must be financed by other nations willing to hold U.S. currency. And foreign investors have also been buyers of federal debt in recent years, helping to keep U.S. interest rates low. But the trend in these deficits now looks unsustainable to many. If those investors sour, even somewhat, on holding U.S. debt, the Treasury may need to offer higher interest on its bonds. The ripple effects, in turn, could dampen U.S. economic growth.

China, another key engine of the world economy, also faces new pressures. Chinese citizens were lining up outside the Bank of China in downtown Shanghai last week to exchange U.S. dollars for their own currency, the yuan, according to The Wall Street Journal. They fear an official revaluation of the yuan, which if it happens would cut into the value of their dollar savings. Europeans, meanwhile, worry that the dollar's fall will harm their weak economic upturn by making their exports more expensive in the United States or in other economies tied to the dollar.

More jobs -- but higher interest rates
Federal Reserve Chairman Alan Greenspan recently warned that foreign investors would eventually resist sending more money to the United States. This could lead to a further decline in the dollar, and possibly higher interest rates in the United States. "We cannot become complacent," he said. How far could the dollar fall? Some see another 20% as possible -- a change they say could begin to reduce the huge trade deficit.

The United States continues to attract large amounts of foreign capital. In September, foreigners purchased $63.4 billion of U.S. securities. But the dollar's recent fall suggests that the current flow is at least a little inadequate.

Up to now, the White House has let the Treasury deal with the dipping dollar. In comments to the press in London, Treasury Secretary John Snow threw cold water on any move to join the Europeans in managing the dollar's fall. "The history of efforts to impose nonmarket valuations on currencies is at best unrewarding and checkered," he said. That view could change if an actual run on the dollar builds up, requiring higher interest rates in the United States to attract foreign money.

Decades ago, such an attitude was labeled "benign neglect." If the dollar continues to fall, though, the president may have to tackle the issue in coming months. If investors in bond markets see rising interest rates ahead to stem a dollar decline, prices of bonds could plunge. But to Thea Lea, an economist with the AFL-CIO, the dollar is "egregiously overvalued," thereby hurting exports and American workers.

Lawrence Kudlow, a Wall Street economist, says the real problem with the dollar is that "Old Europe has the monetary story wrong." The European Central Bank isn't creating enough new euros to stimulate the economy.

Much of Wall Street seems to expect the dollar to fall gradually -- a "Goldilocks" devaluation, says Kathleen Bostjancic of Merrill Lynch. The euro could rise from about $1.32 now to $1.37 by mid-2005, Merrill Lynch traders predict. At a certain point, the European Central Bank could intervene to support the dollar, warns Schubert of Commerzbank. But it hasn't yet.

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Witness the end of an empire.

crazy cat lady

I think there is a lot of truth to that, yes.

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Unequivocally yes.

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Sad to say for a person heading abroad later this month, the dollar's in the crapper.

The worst will come when countries stop holding dollars in reserve. It keeps us afloat. Today's paper noted that Russia was already moving some of it's reserves out of Dollars and into Euros.

And when the world stops trading oil in petrodollars? We're economic toast.

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When you look at the price of gold and US deficit spending it is pretty clear the dollar is in trouble.

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All hell will break loose soon. Are you ready??

Asians make. We take. They save. We spend. They lend. We borrow. They sell. We buy. Confused

We buy...but we have no money. Americans have no savings. And real, actual hourly earnings are going down! The U.S. dollar becomes less and less valuable with almost each passing day.

A European or Asian investor who bought a long-dated Treasury bond on the day of George W. Bush's re-election, for example, has already seen an entire year's worth of interest yield lost because of the falling dollar.

Foreigners hold $10 trillion worth of U.S. dollar assets - and every single day add about $2 billion more! Surprised

Another 10% drop in the dollar will cost foreign investors a trillion in losses. What if the dollar fell 20%? You'd expect them to sell dollars to avoid it. Or at least they would stop buying more.

And when they do so, the U.S. bond market will sense it immediately. That is when the bells will really start to ring - when bond prices fall and yields rise. That is when the door will suddenly give way...and all hell will break loose.

Are you ready?? Neutral

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Gone Fishin

Just curious as one verrrry small cog in the global economy, what can I do? I try to buy Made in the USA, which has got to help microscopically, but what else? Doom and gloom drives me nuts if there's nothing that can be done. And I'm not talking from a "macro" perspective, 'cuz let's face reality, you, I or the next riff-raffer won't be influencing global decisions anytime soon. But from a joe-public, a few thousands of dollars per year of the economy purchase decision making, is there really anything to do?
Or really, do I start stocking the canned goods now? dunno

Adjunct

don't worry JJ, as long as we are the biggest fish in the sea economically, people will want to sell to us, it actually may reduce prices of imports and be good. We are the biggest consumer nation in the world if we don't buy a lot of people will be affected. I think it is in the best interest of the world that the dollar stay stable. If we "turn in" so to speak, countries like China, Malyasia and Taiwain, would be hurt very quickly. It is kind of like the countries in the Middle east with only a one product economy. That is why they should want to sell to the U.S. Dare say if some of these hydrogen electric cars reduce our dependence on foreign oil that the middle east will then have a real reason to hate us as we will hit them in the pocketbook.

I for one am not stocking up on the canned goods.

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Personal opinion.....
Foreigners will sell our bonds/bills until the rate of return increases to the point where it is attractive. However, consumers and industry will pay the price of higher interest rates...which will lead to much lower consumer spending and either job losses or very, very slow job creation levels. And it might be the salad days in America for a bit, but I don't see economic collapse on the horizon. The seeds of the high dollar are now bearing the fruit that will lead to a much lower dollar; which will sow the seeds that will lead to a higher dollar. This is actually good for the economy, it forces a higher level of savings and tends to shakes out the "weak hands" of US businesses (which isn't so good if you work for one of the weak hands).

We saw all this in the late70s and early 80s. We've been here, done that. We are just paying the price for the party days, which in the end paves the way eventually to a new party...business cycle and capitalism require that for all the good days, some rain must follow. We will get by.

Excelent

Ended the year near a 9 year low

http://money.cnn.com/2004/12/31/markets/bondcenter/bonds/index.htm

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Bill Fleckenstein, the contrarian money guide at MSN Money, offers this dim view of the dollar's prospects from an uber-capitalist prespective:

http://moneycentral.msn.com/content/P93626.asp?GT1=5980

He offers this text quoted from a colleague:

"It is generally accepted these days that the continued debasement of the U.S. dollar is a positive. It is also generally accepted to expect that as the buck declines, the U.S. trade deficit will correct itself, like a self-cleaning oven, we have been led to suppose. But upon pondering this 2004 rule of thumb, a question came to mind. Perhaps you can answer it. Here goes:

"At what dollar/yuan (or dollar/won or dollar/anything) level will overseas manufacturers lose the cost-competitive edge to where, say, a Wal-Mart Stores (WMT, news, msgs) (or any other U.S. entity that's contributing to our gaping trade imbalance) will eschew Asia and opt for domestically produced goods? Simply put, how low do we have to push the buck before a 42" TV is cheaper from Sheboygan than from Shenzhen?

"Right off the bat, I'd have to surmise that we won't ever experience that phenomenon, because long before it came anywhere even close to that, the inflation would have eaten us all alive. . . . You still wanna argue about the benefits of a weaker dollar because this will lower our imports and raise our exports with a view to meaningfully closing the trade gap? This of course would encompass the glitch of how to market a U.S.-made $2,200 Maytag Neptune washer/dryer combo to that guy in Nanjing who is pullin' down a cool 76 cents per hour. . . .

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News today from the Brits at "Financial Times" that the dollar is edging higher against foreign curencies.

http://news.ft.com/cms/s/efc79ae0-661d-11d9-8055-00000e2511c8.html

Good and bad news for us, I'd think. Currency markets are responding to Fed comments that they are going to stop the dollar's slide, which is done by more aggressively raising US interest rates. The kind we Americans pay on mortgages and credit cards and car loans.

Backstory--The whole export-friendly position the Bush administration argued for hasn't panned out, so we're moving in a different direction.

is the US dollar a sinking ship?

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