Falling Dollar and Credit Crunch
I've mentioned the credit crisis a number of times in this blog, and now we have another consideration: the state of the dollar. According to the New York Times (and other outlets as well, I'm sure), the dollar fell to a new low point against the euro:
But forget about interest rates going forward, for a moment, and consider what happens to existing debt. As the value of the dollar falls, people and institutions in other countries find that the notes they hold keep dropping in effective value in their home currencies. Instead of paying the equivalent of X euros or Y yen, suddenly you're getting some percentage less. US investors don't see that particular effect as much because they are still paying for things in dollars.
Unfortunately, much of what we consume in this country is imported. As the dollar drops, the imports become more expensive. Consumers need more money to do the same purchasing, and they're not getting it from credit, so they buy less. That slows the economy and, I'm guessing, weakens the dollar even more, because people internationally are less interested in being tied to our currency. That acts as a positive feedback loop, helping to increase the effect.
All in all, I have a funny feeling that the business climate over the next couple of years is going to be much rockier and difficult than I hear most people in business admitting. Maybe I'm wrong, or maybe they don't want to come out and say what is actually happening.
Currencies are influenced by many factors, chief among them expectations for interest rates and inflation. If rates were to fall in the United States and remain unchanged in Europe, as many investors are expecting, traders will probably bid up the exchange value of euros.It makes sense. As interest rates drop in the US, you get less bang for your literal buck, and you want to hold currency that has greater strength, because there's greater demand.
But forget about interest rates going forward, for a moment, and consider what happens to existing debt. As the value of the dollar falls, people and institutions in other countries find that the notes they hold keep dropping in effective value in their home currencies. Instead of paying the equivalent of X euros or Y yen, suddenly you're getting some percentage less. US investors don't see that particular effect as much because they are still paying for things in dollars.
Unfortunately, much of what we consume in this country is imported. As the dollar drops, the imports become more expensive. Consumers need more money to do the same purchasing, and they're not getting it from credit, so they buy less. That slows the economy and, I'm guessing, weakens the dollar even more, because people internationally are less interested in being tied to our currency. That acts as a positive feedback loop, helping to increase the effect.
All in all, I have a funny feeling that the business climate over the next couple of years is going to be much rockier and difficult than I hear most people in business admitting. Maybe I'm wrong, or maybe they don't want to come out and say what is actually happening.
Permalink posted by Erik Sherman at 8:28 AM
1 Comments:
The dollar, as predicted is being crushed. We are now at Par with the Canadian Dollar, the Loonie as it is called. This was all so predictable. You cannot run an 800 bilion dollar trade deficit and have your currency in demand. We have a lot farther to fall. Within 5 years from 2008 we should see the Canadian Dollar worth 25 % more than the U.S. dollar. The Euro at 1.40 now, should move to near 2.50, as China buys more and more of the Euro.
The pound at 2.04 as I write this will be near 3.00. Be ready for CHINA. When they finally let their currency float it will appreciate 70% over a 36 month period. The US trade deficit will be cut in half and then some by 2020.
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