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The U.S Dollar is Diving

Posted by Larry Doyle on September 8, 2009 4:32 PM |

Is the U.S. dollar losing its luster as the world’s international reserve currency? If today’s price action is any indication, the greenback is chugging along like a tired old caboose.

The U.S. dollar index is down a full 1% on the day and making multi-year lows against a wide array of other currencies. Our friendly Wall Street Journal Market Data Currency page provides a useful snapshot of our tired old greenback (click on image for larger chart):

Why is the dollar giving so much ground?

1. perception that the U.S. economy is in tougher shape than other economies around the world.

2. perception that these other economies will be forced to raise rates sooner than the Federal Reserve will raise rates here in the U.S.

3. traders are borrowing U.S. dollars at 0-.25% and using them to invest elsewhere in what is known as the ‘carry trade’ otherwise known as utilizing leverage.

4. continued concern about the viability of the U.S. dollar as the world’s international reserve currency.

The Wall Street Journal offers an interesting perspective on this development in writing, Dollar in a Funk as Traders Bet on Slow Rebound:

Currency analysts say the dollar’s slide has room to run now that it has broken free of recent trading ranges. Several are predicting the euro will test $1.50 by the end of the year. Mr. Mackel also sees continued strength, in particular, for the Australian dollar, which is backed by a healthy economy and exposure to a rebounding China. He says the Aussie currency could reach near parity with the U.S. dollar by the end of 2010. Early afternoon Tuesday it was trading at US$0.8641, up from US$0.8560.

Friday’s U.S. jobs report was a significant factor in the dollar’s fall. The U.S. unemployment rate hit 9.7% in August, and that means the Federal Reserve will likely keep interest rates low for the foreseeable future.

I maintain that our leaders in Washington are not unhappy with a weaker dollar. Why? A weaker currency will help promote greater exports as our products appear cheaper. Additionally, it is a means toward generating inflation and effectively monetizing our growing deficit. That said, how do the wizards in Washington stop the slide of the dollar and generate only a whiff of inflation?

The simple fact is a decline in the dollar is a global statement of lessened confidence in the American economy as the driver of global growth.

That is reality.


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