Theme by nostrich.
Post with 2 notes
exchange rates & the dollar’s decline
So you’ve heard about the dollar’s decline. You know it’s now equivalent to the Canadian dollar, 2 dollars equals about one pound, and about 1.5 dollars equals one euro. But unless you’re travelling out of the country why should you care, you ask? What do the exchange rates actually mean?
- Basically, the decline in the dollar indicates a slow in domestic growth and an increase in international growth. It indicates the world’s weakened confidence in the US, and in turn, it’s strengthened confidence in the currencies on the rise (Europe, Britain, Canada).
- Higher prices, of course.
- Inflation: The declining dollar has an positive relationship and impact on inflation. When the dollar falls, inflation alarm bells chime.
- Exports thrive. Imports fall: It’s cheaper for, say, the French to buy our exported goods. Imports either become more expensive (though since more than 1/3 of our imports are from Asia, and the Asian currencies are more stable with the dollar than the euro or pound, this effect may not be as profound), or fearing a decline in US consumer spending, some luxury imports, like BMW cars, have remained steady and the manufacturers accept lower profits. Who knows how long that will last.
How did we get here?
- The Fed has cut rates from 5.25 Jan 2007 to 4.25 Jan 08. With lower target rates, US Treasury bonds have a lower yield. Thus, no one (especially the foreign investors who were once stoked on doing so) wants to buy the US treasury bonds. Our 2.5 Trillion federal debt certainly does not help.
- Nobody wants to hold dollars: A dollar is basically a piece of paper symbolizing faith. You have faith that when you go down the street to the store and hand the clerk your piece of paper with the number 20 on it, that he believes it is worth something. It’s not back by anything (dollars used to be backed by gold, they are no longer so). SOoo basically people’s faith in the dollar is weakening. Nobody wants to hold dollars because they don’t have faith that is it worth as much as it used to be, and certainly not worth as much as say the euro or the pound. As a result of this, we may see China and Japan, the US’s largest investors, dump their dollar reserves & pick up the euro instead, further weakening the dollar.
Any up sides?
- Well yes, as aforementioned – a lower dollar helps boost US exports. So that’s good for the economy.
- A weaker dollar benefits US companies that have international operations, like McDonald’s or Coke. The profit they earn overseas in foreign currencies is worth more when converted into dollars. (thus, you should look to US companies with operations abroad for keen investments).
- If you bought gold back in early or mid 2007 when it was trading at about 670, you’d be pretty pleased, as gold rises when the dollar declines.
And as a WSJ reader sums it up… “you cannot spend over a trillion dollars in Iraq and hundreds of billions more on fighting Islamic terrorism, borrow most of it from the People’s Republic of China and other overseas buyers of Treasury securities, not pay attention to Social Security, do nothing about our “addiction to oil” and have a strong dollar at the same time.”
