Investment Warrior Report Archive Article

The Falling Dollar - What Does It Mean? - Bill Lussenheide 

The U.S. dollar is falling versus other major world currencies. The dollar has fallen nearly 25 percent in the past 18 months against a composite of other major currencies such as the euro, the Japanese yen and the Canadian dollar. What does this mean for our economy and our investments? 

 The dollar has been made deliberately lower by our Federal Reserve through the use of lower interest rates. Lower interest rates, along with budget deficit spending , results in more money in the system, and hence a lowering in the value of the currency because there is "more of it"

A weaker dollar helps the economy by boosting U.S. exports, because American-made goods become cheaper in terms of foreign currencies. A lower dollar will also mean higher prices domestically for many imported products. Higher-priced imports will help American producers, , though some U.S. firms may raise their prices and match the market to take more profit. The end result: more U.S. jobs but higher prices at the checkout counter, and an increase in the inflation rate. Gold (which actually never changes in value, but reflects the value of the currency it is quoted in) increases in dollar terms when the dollar falls in value. 

One currency that the dollar hasn't fallen against is the the Chinese yuan. China, which is a major exporter to the United States, keeps its exchange rate fixed at 8.3 yuan to the dollar. For this reason, the competitive balance between U.S. workers and Chinese workers will not change, in spite of what happens between the dollar and other currencies. In fact, the falling dollar has helped Chinese exports to Europe and other countries. 

Another factor in the dollar fall is that foreigners are investing less money in the United States. Foreign firms aren't building factories here or buying into American companies at the same pace as they did during the 1990s. Foreign investment in U.S. stocks has dropped dramatically, and purchases of corporate bonds are off as well. On the other side of the coin, investments made by Americans in international stocks, actually go up, even if the foreign market just remains in a standstill. That is because when priced in dollars, the value of foreign stocks go up even without share appreciation. 

The movement of currencies happens in broad based secular movements lasting several years. Imbalances tend to work out over time. It is likely that Europe will soon be aggressively lowering its interest rates and devaluing its currency to protect its markets very soon. So although the dollar has fallen, it does not represent the end of the dollar as a major currency, or the end of the American "Manifest Destiny"



Copyright 2003 Lussenheide Capital Management Inc