Dollar slide - Reasons and what it means

Dollar's Decline Speeds Up, With Risks for U.S.

Excerpts:

The U.S. dollar's downward slide is accelerating as low interest rates, inflation concerns and the massive federal budget deficit undermine the currency.

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The main driver for the dollar's decline is low interest rates in the U.S. compared with higher and rising rates abroad. Lower rates mean a lower return on cash—and the pressure from that factor could intensify next week when the Federal Reserve's rate-setting committee is expected to signal that U.S. short-term rates will likely remain near zero for many months to come. On Wednesday, Fed Chairman Ben Bernanke is scheduled to give the central bank's first-ever press conference following a policy-setting meeting.

But it is worry about the U.S. budget deficit that is intensifying the selloff. On Monday, investors were spooked by a warning from Standard & Poor's that it might take away the U.S. government's coveted AAA rating status amid concerns the Obama administration and Republicans in Congress might not be able to agree to significant reductions in the deficit.

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A weaker dollar is a boon for U.S. exporters by making their goods more competitively priced. This has been a tailwind for technology companies and manufacturers, a bright spot in the otherwise slow economic recovery.

Comment: But bad for imports.

Greenback is not just America's currency. It's the world's!

Why the Dollar's Reign Is Near an End

Excerpts:

Consider this: When a South Korean wine wholesaler wants to import Chilean cabernet, the Korean importer buys U.S. dollars, not pesos, with which to pay the Chilean exporter. Indeed, the dollar is virtually the exclusive vehicle for foreign-exchange transactions between Chile and Korea, despite the fact that less than 20% of the merchandise trade of both countries is with the U.S.

Chile and Korea are hardly an anomaly: Fully 85% of foreign-exchange transactions world-wide are trades of other currencies for dollars. What's more, what is true of foreign-exchange transactions is true of other international business. The Organization of Petroleum Exporting Countries sets the price of oil in dollars. The dollar is the currency of denomination of half of all international debt securities. More than 60% of the foreign reserves of central banks and governments are in dollars.

The greenback, in other words, is not just America's currency. It's the world's.

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The dollar is about to have real rivals in the international sphere for the first time in 50 years. There will soon be two viable alternatives, in the form of the euro and China's yuan.

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Foreign investors—private and official alike—hold dollars not simply because they are liquid but because they are secure. The U.S. government has a history of honoring its obligations, and it has always had the fiscal capacity to do so.

But now, mainly as a result of the financial crisis, federal debt is approaching 75% of U.S. gross domestic product. Trillion-dollar deficits stretch as far as the eye can see. And as the burden of debt service grows heavier, questions will be asked about whether the U.S. intends to maintain the value of its debts or might resort to inflating them away. Foreign investors will be reluctant to put all their eggs in the dollar basket. At a minimum, the dollar will have to share its safe-haven status with other currencies.

Comment: A very good article on currency exchange. (Which I find to be a complicated subject).

Bernanke's "delicate dance"

Fed Will Keep Eye on Sliding Dollar

Excerpt:

Federal Reserve Chairman Ben Bernanke on Monday said the central bank will keep a close eye on the sliding U.S. dollar even as he pledged anew to keep interest rates at record-lows to nurture the economic recovery.

In remarks to the Economic Club of New York, Bernanke engaged in a delicate dance.

He made clear Fed policymakers will keep rates at super-low levels. Yet through his words, Bernanke is also trying to bolster confidence in the dollar without actually raising rates, a move that could short-circuit the fragile recovery.

Economists say a free-fall in the value of the dollar is remote but can't be entirely dismissed.

Although low interest rates can put additional downward pressure on the dollar, they are needed to encourage American consumers and businesses to spend more and fuel the economic turnaround.

Comment: If he holds interest rates low to stimulate the economy, the dollar will continue to drop (or at least be suppressed). Raise interest rates (savers would rejoice!) would prop the dollar but hurt the recovery.

European missions: 35% loss of buying power

Weak dollar undercuts missionaries, relief workers

Excerpt:

For missionaries and faith-based relief groups, the weak dollar has been a major headache. It's caused them to cut back on budgets and cancel projects around the world. And it's made the small things of daily life, like buying groceries or gas, more difficult.
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The main challenge is the strength of the euro. In 2002, the dollar and the euro were equal. It takes $1.47 to match a euro — a loss of more than 35% in buying power. The cost of everything from saltine crackers to the monthly heating bill has skyrocketed.

In response, missionaries have cut back wherever they can.

Susan Jett, a Southern Baptist missionary to Germany currently on furlough in Knoxville, says she quit buying necessities like clothes and even sending mail. "I don't mail anything back home," she said. "I wait for someone who is flying back and send it with them."

Jett said it's the cost of small things, such as day-to-day basics, like milk and bread, that add up. "I have to think twice before buying anything."

That means forgoing small familiar pleasures like going to McDonald's. Like many Americans living overseas, missionaries relish the chance to visit the golden arches.

"It smells like home," says Dennis Barton, a missionary who recently returned to the United States after more than 20 years in Europe. But even the bargain menu is now too pricey, Jett said. "For a family of four, it's more than 25 euros," Jett said. That's more than $36 in U.S. currency.

Comment: Something to pray about re missions!

Audi attracted by weak dollar!

Audi Considers Stateside Factory

Excerpt:

BMW builds Bimmers in South Carolina. Mercedes-Benz manufactures Mercs in Alabama. Now Audi's considering an American factory. According to Auto Backstage, Audi CEO Rupert Stadler told Auto Motor und Sport that the weak dollar has forced Ingolstadt to consider building a factory in the U.S. Audi is aiming for an eight percent profit margin; an American assembly plant could help them realize that goal

Falling dollar good for exports

Falling Dollar Spurs Foreigners to Buy American, Pushing Exports to Record Level

Excerpt:

The improvement came from a 1.1 percent jump in U.S. exports, which climbed to a record $140.1 billion. The dollars' decline against many major currencies has made U.S. goods cheaper and more competitive in foreign markets. For September, sales of American-made cars, computers and farm products including corn, cotton, wheat and soybeans were all up.

Imports also rose in September, climbing by 0.6 percent to $196.6 billion, the second highest level on record. Imports of foreign-made cars, televisions and clothing were all up. Oil imports, however, fell by 0.8 percent to $10.5 billion, an improvement that is likely to be temporary given the recent surge in oil prices to close to $100 per barrel.

The deficit with China rose 5.5 percent to $23.8 billion, second only to a $24.4 billion deficit in October 2006. Imports surged to the second highest level on record, pushed up by big gains in imports of Chinese-made televisions, cell phones, computers and toys as retailers stocked their shelves for Christmas.

Those gains were occurring despite a string of high-profile recalls of Chinese products this year -- everything from toys with lead paint to defective tires and chemical-tainted toothpaste and pet food ingredients.

Through September, the trade deficit is running at an annual rate of $703.4 billion, down by 7.4 percent from last year's $758.5 billion. Analysts believe that surging exports from a weaker dollar will lead to a narrowing of the deficit for the full year, breaking a string of five consecutive records.

Critics of President Bush's trade policies say that even with the narrowing of the deficit this year, the imbalances are still running at unsustainable levels, forcing the United States to depend more and more on foreigners' willingness to hold dollars to finance the imbalances.

While a falling dollar is good for exports, it raises worries that at some point foreigners will be less willing to purchase dollar-denominated investments such as U.S. stocks and bonds. Such a change in sentiment could send stock prices plunging and push up U.S. interest rates.

Comment: The economic silver behind the gray cloud!

Sarkozy, euro vs $, Airbus Costs

Sarkozy Says Dollar Drop Risks Triggering Trade War

Excerpt:

Sarkozy said yesterday that Toulouse, France-based Airbus SAS, the world's biggest planemaker, loses about 1 billion euros ($1.5 billion) for every 10-cent increase against the dollar.


``Those who admire the nation that has built the world's greatest economy and has never ceased trying to persuade the world of the advantages of free trade expect her to be the first to promote fair exchange rates,'' Sarkozy said. He repeated his concern that the Chinese yuan is unfairly undervalued.


Comment: Follow on to early CFG post: "... the drop in the dollar makes the cost of United State goods and services less expensive to consumers in other countries and the cost of other countries' goods and services more expensive to us in the United States. Thus exports should be increasing in coming days and imports decreasing." Sarkozy's concern is that Airbus sales to US carriers will tank!