Friday, November 20, 2009

Dollar Days

Much is being made in the financial press of the U.S. dollar weakness. The greenback is down some 16% since the first quarter of this year. A weak dollar seems like a good idea given that the U.S. needs to export more goods to pay off the horrendous debt loads we are carrying.

However, only exporters seem to be happy. The Chinese are getting nervous about their enormous U.S. treasury holdings - a part of their plan to keep the U.S. dollar strong and buying every larger quantities of Chinese goods. The European Union members are also stressed as they observe the euro climbing back through the $1.50 level. U.S. patriots do not want to see the U.S. currency fall from its lofty perch as the world currency.

What is the worry? The International Monetary Fund data suggests over 63% of the world’s foreign currency reserves are held in U.S. dollars while 28% are in Euros. The yen and renminbi among others take up the remaining 9%. Are Saudi oil barons going to switch to a new international reserve currency to sell their oil output?

It is the give and take of trade and the need for a reliable currency to facilitate that makes the U.S. dollar the currency of choice. It would take a leap of faith to switch to a new currency. What entity would back it up? The IMF?

While policy makers would suggest that there is no link between U.S. debt and the value of the dollar, I have been skeptical. The popularity of the U.S. dollar as that medium of choice has enabled the debt-habit of the U.S. government and its citizen consumers. Where else but the U.S. treasury bond market would the amply supply of U.S. dollars come from to slosh around the worlds markets for everything from oil from Saudi Arabia to plastic flip flops from China. The sun never sets on the U.S. bond market.

The value of the dollar and the world’s trade of goods and services are inexorably linked to the U.S. consumer/debt economy. The ability of the U.S. to change its economy - from one based on consumerism and the import of massive amounts of crude oil as well as the reduction in our federal deficit - is tightly linked to the U.S. dollar in its travels oversees.

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