From ChicagoFed.org, I got a list of factors that impact currency value. I’m trying to understand why the US Dollar is weakening so much. Based on the info. below, I’m a bit confused. The U.S. has low inflation, a consistent gov’t deficit, a relatively strong economy (dollar has been falling for years), relatively stable prices, and the US gov’t has a perfect credit rating. So the only 2 factors that I can see that are hurting the USD is the trade deficit and low interest rates. Are these 2 factors simply overwhelming to the dollar value or am I missing something here? I had also been under the impression that a strong currency value had the tendency to increase cost of living (i.e. the UK), but the Chicago Fed reports the opposite, saying that foreign imports are more expensive, thus pushing up cost of living/inflation. Is this true about inflation? Oh, and what are the long-term harmful consequences (to the U.S.) of a weak dollar (inflation included)? Factors Contributing to a Strong Currency Higher interest rates in home country than abroad Lower rates of inflation A domestic trade surplus relative to other countries A large, consistent government deficit crowding out domestic borrowing Political or military unrest in other countries A strong domestic financial market Strong domestic economy/weaker foreign economies No record of default on government debt Sound monetary policy aimed at price stability. Factors Contributing to a Weak Currency Lower interest rates in home country than abroad Higher rates of inflation A domestic trade deficit relative to other countries A consistent government surplus Relative political/military stability in other countries A collapsing domestic financial market Weak domestic economy/stronger foreign economies Frequent or recent default on government debt Monetary policy that frequently changes objectives.
In the level 3 curriculum for 2007 it made us memorize the 4 methods for currency valuation… I can’t remember them exactly but in the real world they often give out conflicting signals. One thing your post is blatantly missing is something to do with price parity. The theory is that a widget should cost the same in whichever country, otherwise it will be imported, arbed, etc. To answer your question about the weak dollar, I’d say that even though our short term interest rates are relatively high compared to say, canada, it’s the movement that is important. A .5% cut is substantial and the market is reacting. Also, we have a gov’t budget deficit, and a trade deficit. NEither of which are good for the currency despite what the chicago fed says. A strong currency improves the cost of living because it allows the citizens of the country with the strong currency to buy more stuff in the cheap currency countries. IMHO, Inflation & weak currency are NO PROBLEM long term if they don’t move too quickly.
Saudi Arabia is thinking about unpegging its currency with US$ http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2007/09/19/bcnsaudi119.xml If this becomes true, it can create a domino effect to unpeg more currencies. This can create panic and have disastrous effect on the value of US$. So go buy some gold and pray…
Another thing is that Asian and European banks were burned by subprime crisis because they trusted Moody’s et al’s CDO ratings. They are not going to buy CDOs any time soon. This reduced dollar demand a lot.
It’s 1973 all over again! Well, maybe not (and none of you youngsters remember that anyway). To that list I would add: Technical factors (currency trends) Govt policy decisions affecting the value of the currency either directly or indirectly. Relative attractiveness of investment in the countries. The US economy and political clout is big enough that if the Treasury didn’t want the dollar to fall like this, it wouldn’t. Either they don’t care or they want it to fall. As ymc pointed out, there’s something messed up about investing in US assets. It’s not CDO’s (which are big, no question) but all other ratings-based lending. If you live in Japan, how would you feel about investing your money in something about which you can’t do any due diligence about yourself except you are going to trust US ratings companies? We also seem to have ourselves in two stupid forever wars that look more like Vietnam all the time (Christmas bombings anyone? Maybe we’ll start bombing insurgents in neighboring Iran and Syria.) In case you don’t remember, Vietnam led to the collapse of all the currency pegs with the demise of the Bretton Woods agreement. I used to hate people saying Iraq was the new Vietnam. Now when people say it, I nod my head hoping they forget that I once told them the analogy was stupid. War debt is bad for currency. BTW - I am a single issue voter next time. If I think someone can get us out of that war, I don’t care if they are a philandering, alcoholic, drug-abusing, Voodoo-practicing transvestite.
If you feel the dollar is going to decline further, possible signficantly, what is the best way to make money off of this? Betting on a different currency (if so, which one) or gold?
To profit off a decline dollar you could buy gold or oil (oil is priced in $s). As far as the reasons behind the $s fall while I’m not an expert in the area I tend to feel the investors expect that US will eventually have to “inflate” their way out of both goverment and personal debts.
(to Joey D) I am glad my immediate family members are serving in a “stupid” war. I am also glad to hear that you wouldn’t mind if their future commander in chief is “a philandering, alcoholic, drug-abusing, Voodoo-practicing transvestite.” Most of all, I am glad you shared your political views with all of us. Thanks.
emerald33 Wrote: ------------------------------------------------------- > (to Joey D) I am glad my immediate family members > are serving in a “stupid” war. How does this have anything to do with the point Joey was making.
In other posts Joey has made clear that he admires the bravery, dedication, and contributions of the soldiers fighting in Iraq. I think his point is that it was stupid for the political leadership to put them in this situation in a war of their choosing. Note that Joey didn’t chose to attack our efforts in Afghanistan, where the problem isin lack of follow-on, not that we invaded under false pretenses and then made up alternate excuses when we realized that there were no WMDs and that Saddam didn’t plan or contribute to Sep 11.
PRE Wrote: ------------------------------------------------------- > emerald33 Wrote: > -------------------------------------------------- > ----- > > (to Joey D) I am glad my immediate family > members > > are serving in a “stupid” war. > > How does this have anything to do with the point > Joey was making. I don’t see how it doesn’t? Please enlighten me.
bchadwick Wrote: ------------------------------------------------------- > In other posts Joey has made clear that he admires > the bravery, dedication, and contributions of the > soldiers fighting in Iraq. I think his point is > that it was stupid for the political leadership to > put them in this situation in a war of their > choosing. Note that Joey didn’t chose to attack > our efforts in Afghanistan, where the problem isin > lack of follow-on, not that we invaded under false > pretenses and then made up alternate excuses when > we realized that there were no WMDs and that > Saddam didn’t plan or contribute to Sep 11. He mentioned two wars. What are the two wars then? Obviously, my views are completely different than yours, PREs, and Joeys. This is not the place for this. I am sorry for bringing this up.
Yeah, let’s keep this forum apolitical. So emerald, do you think the dollar will go up or down and for what reasons?
China hordes more than a trillion dollars worth of US debt. Prob. How in the world are they going to hedge such an exchange risk?
Currency Swap? Not sure if they can find someone to play this zero-sum game with them though. But we can expect them to buy less T-bonds. They are likely to buy more US tangible assets on the cheap however.
I dunno, maybe buy a controlling share of our equities and manage our companies for us. Not that they did such a great job of managing their own economy when it was centrally controlled.
Anyone thought Blackstone was a bad investment?
I would like to point out, again, that the government inflation numbers are garbage and we are experiencing far more of it than the figures suggest. Screw $80 oil, did anyone notice that wheat costs $8.50 a bushel? The easy money policy of the early 2000s pushed the prices of everything up, the fed waited way too long to tighten and by the time it did we had a housing problem that was destined to be ugly when it came undone. Now we have to pay the piper and that means either a recession or runaway inflation. The fed chose inflation. Big mistake in my opinion. In addition to the above, kkent explained it well by pointing out that the trade deficit in particular overwhelms all other factors.
I remember in my college Econ class, we ran through the math on how persistent gov’t deficit will eventually lead to run-away inflation. Thought it was pretty cool. Just heard today that the congressional budget estimated that a it would cost the US another 2 trillion dollars to station 55,000 troops in Iraq for the next 4 decades. Now if one would entertain what would happen to our current healthcare, social security system, I think the best investment for the next decades would be in anti-inflationary commodities, or bet against US currency
ymc Wrote: ------------------------------------------------------- > Currency Swap? Not sure if they can find someone > to play this zero-sum game with them though. > > But we can expect them to buy less T-bonds. They > are likely to buy more US tangible assets on the > cheap however. I’m here for them. If they want to do a trillion dollar currency swap, I’m in! They might be taking on a little counterparty risk though.