Goodbye Yankee Dollar
Amid growing expectations of a slowing U.S. economy and potential interest rate cut by the Federal Reserve, the U.S. dollar fell to a new record low against the euro. Earlier on Wednesday the euro touched $1.3913, its highest level since the European currency was launched back in January 1999. “It’s all about lower growth, lower rate expectations now,” Gregory Salvaggio, senior currency trader at Tempus Consulting in Washington, told Reuters this afternoon. He added, “That combination is fueling a shift to the euro, especially ahead of the Fed’s meeting next week, and now that we broke $1.39, the next one at $1.40 is within sight.” Jonathan Cavanagh, a currency strategist at Sydney-based Westpac Banking Corp., told Bloomberg that, “The dollar is likely to continue falling with the potential rate cut in the U.S.. The European Central Bank has a tightening bias, which puts them at a favorable differential to the U.S.”
Highlighting the longer-term decline of the greenback versus other currencies was the International Monetary Fund (IMF) announcement today that the dominance of the U.S. dollar as the world’s reserve currency is declining as the euro becomes more popular, especially among developing countries. The IMF found that, “Nonindustrial countries hold some 30 percent of their reserve assets in euros and 60 percent in dollars (as of December 2006), compared with 19 percent and 70 percent, respectively, six years ago.” Developed nations are also adding euros to their currency holdings. “Industrial countries’ use of the euro has risen to 21 percent from 17 percent in December 2000, while their dollar holdings have remained fairly steady at 72 percent compared with nearly 73 percent six years earlier,” according to the Washington, DC-based organization.
The importance of the U.S. dollar as the world’s reserve currency lies in the fact that the United States was able to run trade deficits exempt from free market forces that would have required an adjustment and a devaluation of the dollar. And what will happen if the dollar loses its reserve status? According to Peter Schiff in his book Crash Proof: How to Profit from the Coming Economic Collapse:
In any event, the U.S. dollar’s status as a reserve currency immune from market pressures cannot last indefinitely. When it ends, all those surplus dollars will come home to roost, creating hyperinflation domestically.
Got gold?
September 22nd, 2007 at 8:12 am
Bernanke has a big job ahead of him.
We cannot sustain 800 bilion a year trade deficits. We cannot export our way out of this mess. The only answer is a sharply lower dollar to drive manufactruing home and to lower the trade deficit. The dollar has much farther to fall. What you are seeing is a long term effort (it will take 20 years) to get the trade deficit back under 1% of GDP. We are currently running a trade imbalance of nearly 6% of GDP. No nation can do this. The IMF would be stepping in to help any nation if its trade imbalance went to 6% of GDP becuase its currency would collapse! The U.S. is different, but still, we cannot sustain a trade deficit of this magnitude. People must understand that when we buy an item from say China, we pay in dollars. The Chinese company we just bought from them goes to an Exchange Bank in China and converts those dollars to Yuan. The Chinese banking system (Chinese Government) is now sitting on those dollars. They can either 1, buy oil, 2, buy Treasuries, 3. buy U.S goods, 4. buy U.S. Corporations, 5. other. Over time if we (the U.S. ) continue to run a trade deficit we could simply be completely bought and controlled by foreigners. Warren Buffet has explained the situation as being like a rich Texas farmer who loses a small piece of his land year after year and never notices for a while. When he then notices, tragedy sets in because he no longer controls his land. So in sum, we need to get the trade deficit way down. This is why the Fed has abandoned the dollar. It wil be going down for the next 20 years. That is how long it is going to take to correct this imbalance mess.
October 3rd, 2007 at 5:06 pm
The U.S. Trade Deficit is a huge problem. We will either end up being owned by foreigners or we will simply fade away. Both prospects are quite un-
American. Some basic facts: The U.S. has not had a trade surplus with the world since 1974. We have not had a trade surplus with Japan since April of 1976. We stopped having trade surpluses with Eurpoe in 1983. Fifteen years ago we did not have a trade deficit with China. Now we have a 250 Billion a year deficit with the People’s Republic. A nation that does not make anything is a worthless nation. Worse, the longer we go without making the needed investments in our manufacturing infrastructure, the more knowledge we lose. We will either forget how to manufacture or we will simply not be good at it. Our creative energy fades away if we do not use it. Also, it is innate to want to make things. Kids play in sand boxes, youg men build tree forts. This is human nature. All of this is being taken away from the American people by idiots in Washington who do not know how to make trade deals. I may write a book on this topic.
October 4th, 2007 at 11:19 am
Ames:
Thanks for the comments. I’m with you- I wholeheartedly believe that the U.S. trade deficit is a HUGE problem. Unfortunately, we have becom a nation of borrowers and consumers, rather than savers and producers. This will not end well. Yet, there are still some out there who say the trade deficit doesn’t matter (I just read a blog on Tuesday night which argued this point).
If you write a book on this topic, I assure you that it will have more than its share of naysayers…
April 23rd, 2008 at 5:47 am
Editor:
I am still amazed that so few in the financial media sufficiently explain the correlation between the sinking dollar and the U.S. merchandise trade deficit. It is a pure supply and demand issue. We have placed too many dollars on the world market via our obscene trade policies. No nation will have a strong, viable currency if it decides to run an 800 billion dollar trade deficit.
April 23rd, 2008 at 9:12 pm
Thanks for the comment Ames.
“I am still amazed that so few in the financial media sufficiently explain the correlation between the sinking dollar and the U.S. merchandise trade deficit.”
Some don’t even believe there’s a correlation between the two:
“Lastly, when asked by Mr. Kudlow about the falling dollar, Mr. McCain’s mentioned the trade ‘deficit’ factoring into the weak greenback. This response is concerning since there’s no relationship between the deficit and the dollar.”
“McCain’s Mixed Economics”
John Tamny
New York Sun, April 23, 2008
http://www2.nysun.com/article/75137
April 26th, 2008 at 9:06 pm
Editor:
That is an amazing quote. I guess they never learned about supply and demand or the teachings of Adam Smith. What we call free trade isn’t trade at all. The American people need to be seriously educated on these topics.
May 2nd, 2008 at 8:33 pm
Thanks Ames.
“The American people need to be seriously educated on these topics.”
We need to be educated on A LOT of topics, it appears…
July 8th, 2008 at 6:30 am
Editor:
Maybe we will see a little rally in the dollar. It just can’t sustain itself however. We have too many of them out there in the world. Why our government seems to think running 700 billion dollar trade deficits is acceptable is beyond me. The so called principles of Free Trade are destroying America. It really is not trade at all. It should simply be called “America Buying Things.”
July 8th, 2008 at 10:38 pm
Thanks for the comment Ames.
“Maybe we will see a little rally in the dollar.”
Looks like that’s what we’re seeing now. I’m with you though— it just can’t sustain itself. Too many reasons out there for the greenback to keep on falling.
“It should simply be called ‘America Buying Things.’”
Alas, future generations will see how we became a nation of spenders, not savers, and consumers, not producers, and ask us, “What the hell were you thinking?”
July 21st, 2008 at 5:19 am
If Saudi Arabia removes the dollar peg then it is all over. The Euro will have won and not only will the dollar all but collapse but America will fall as well. Our trade policies since 1974 have destroyed our own currency. We must engage in only balanced trade. We must scrap all trade agreements and start over. The next 10 years can either see a new America emerge that puts America first or we will see the nation spiral to oblivion.
July 22nd, 2008 at 10:03 am
Thanks for the comment Ames.
“The next 10 years can either see a new America emerge that puts America first or we will see the nation spiral to oblivion.”
While I doubt the nation wil “sprial to oblivion,” I fear we will see a lot of pain first before this country is back on track again.
Heck, down the line, I don’t even care if we ever become “first” again. I’d be happy with “prosperous,” thank you.