A reminder
We discussed the dollar versus the Euro and the pound the other day. IBD gives us some additional data:
Look at the dollar weighted against all its trading partners, not just a cherry-picked few, and you see the dollar hasn’t plunged at all. It’s about where it was 10 years ago — during the Internet boom. It rose sharply in the late 1990s, thanks to the outsized returns offered in the U.S. markets compared with elsewhere. Today, after the Nasdaq meltdown in 1999 and 2000, a recession and 9/11, the flood of investment isn’t as great.
True, the dollar has weakened against specific currencies — the euro and yen are recent standouts — but that weakness must also be put into context. The dollar strengthened in the late 1990s due to Mexico’s peso crisis, the Asian financial crisis and Russia’s market meltdown and ruble collapse. All of these sent capital fleeing to the U.S. Meanwhile, U.S. stock markets were roaring. Anyone anywhere with surplus cash protected it by investing in America.
Those who think a strong dollar means a strong economy have to explain why, from 1997 to 2002, a time of record dollar strength, the U.S. economy experienced a number of problems — including a stock collapse and recession. Those conditions no longer prevail today. Reccently, the U.S. also has been cutting interest rates, while the central banks of Europe and Japan barely have budged. So far this year, the Fed has cut its benchmark rate by 75 basis points. By contrast, the European Central Bank has raised rates by 50 basis points. So the spread has widened by 125 basis points in just 11 months.
Good to bear in mind, since we may well be seeing rate cuts in the US of a further 100-150 basis points over the coming months.
December 2nd, 2007 at 2:06 pm
Remember when Republicans were the party of ideas? It seems like an eternity ago.
The IBD editorial concludes:
Wonderful! I have a strategery: let’s make the dollar drop further so we can celebrate even more.
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The dollar advanced because the world believed that America would lead the way into the future. The dollar is dropping because the world increasingly disbelieves that.
Afaic American decline is obvious, but it is neither inevitable nor irreversible. Nor is it accidental. Who benefits? On the left, there are obvious culprits: trial lawyers, social-service apparatchiks, NGO nannystaters, deathwish Greens, and so on. Watching Bush, Rove, DeLay, Lott, Rice, Miers, etc leaves me in no doubt that a similar rogues’ gallery exists on the right.
December 2nd, 2007 at 4:30 pm
Well said, Dinocrat. A much needed dose of perspective.
December 3rd, 2007 at 4:00 pm
GS, the dollar is dropping because of high energy prices…
$100 a barrel oil has caused the middle east to diversify their US currency based holdings. With that kind of wealth coming in they had to spread their investments around. Once they started to make that move, the ripple effects caused others to change from their “steady state” belief in the US dollar. The trend was changed.
The middle east changed their accepted investment trend away from US dollars to a basket of currencies. The rest of the world had to adjust.
December 3rd, 2007 at 8:14 pm
Canucklehead, I don’t necessarily disagree, but IMHO high energy prices are only one of the reasons for the dollar’s drop. For example, compare this chart to Dinocrat’s.
I conjecture that it’s not just energy prices in themselves that push the dollar down, but also America’s listless response to the oil run-up, e.g. our failure to facilitate domestic exploration; it’s not just near-term economic fundamentals that push down the dollar, but also the perception of how the US is positioning itself for the future.
December 4th, 2007 at 10:56 am
GS, I think the wealth created in the middle east by the high oil prices reached a threshold where risk management strategies related to potential US currency devaluation had to be enacted. The cumulative wealth denominated in US dollars needed to be moved into other currencies or other financial instruments (such as company equity). Prior to the decision to diversify the currency denomination of their financial holdings, everything was steady state.
The decline in the valuation of the US dollar is a side effect of the decision to diversify thier financial holdings. Once the middle east made that decision, one of the floors supporting the US dollar was removed. China has to follow the middle east’s lead.