Dollar Takes Another Pounding

The Guardian notes that the dollar has just fallen to a low against the pound ($2.10) and the euro ($1.47). Driving the proof that, when it comes to expectations, there may be no bottom, is speculation whether China is going to start shifting its foreign reserves out of dollars.

Analysts said today's falls had been sparked by comments made by Cheng Siwei, vice chairman of China's National People's Congress. He told a Beijing conference on Tuesday that China would "favour stronger currencies over weaker ones, and readjust accordingly".


A vice director of China's central bank, Xu Jian, was also quoted as telling the conference that the dollar was "losing its status as the world currency".

Those hoping for lower oil and fuel prices in the US should not keep holding their breath, because relief is a long way off. As my wife, after reviewing some old receipts, said to me last night, "I started longing for the days of $1.89 gas. Then $2.89 gas." And then $3.89 gas.

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:

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.