Pundits have been predicting the demise of the dollar for a while now. Lower housing starts they claim are predicting the end of the US housing boom. This will significantly impact the economy and the Fed will have to ease rates next year to stimulate growth.
The second and ever popular argument used is the negative trade balance. Cheap imports from China being especially to blame. The trade balance should be a negative 750 billion or thereabouts they say.
And the final argument is that robust growth in the EU and the UK will lead to better investment prospects there and the ECB will be raising rates for a while to contain inflation. All in all, it looks pretty bleak for the dollar doesn't it? It is now at a 18 month low and predicted to continue a steady decline against the Euro and the Pound.
However, these same pundits have been proclaiming the death of the US economy for years. Despite what they say, the US continues to be the engine of the world's economy. Not only that, I don't see any decline in the number of bright, smart people who wish to study in top US universities. Yes, there have been job losses in recent years due to offshoring of low-skill tasks and artificially cheap imports from China but in the total context of the US economy, these are insignificant. Despite being so large, the US economy continues to grow and produces ample jobs to ensure that the unemployment rate is among the lowest in the world.
Will the dollar lose value. Yes. But let's not get overly-dramatic ladies and gents. There is zero chance that the dollar will no longer be used as the world's reserve currency. In fact, I see more problems for European and British companies. Their goods and services are already uncompetitive with those from China. Now, they will become less competitive even with the US.
Indeed, the dollar would quote Mark Twain and say that -"The rumors of my death have been greatly exaggerated"!
The second and ever popular argument used is the negative trade balance. Cheap imports from China being especially to blame. The trade balance should be a negative 750 billion or thereabouts they say.
And the final argument is that robust growth in the EU and the UK will lead to better investment prospects there and the ECB will be raising rates for a while to contain inflation. All in all, it looks pretty bleak for the dollar doesn't it? It is now at a 18 month low and predicted to continue a steady decline against the Euro and the Pound.
However, these same pundits have been proclaiming the death of the US economy for years. Despite what they say, the US continues to be the engine of the world's economy. Not only that, I don't see any decline in the number of bright, smart people who wish to study in top US universities. Yes, there have been job losses in recent years due to offshoring of low-skill tasks and artificially cheap imports from China but in the total context of the US economy, these are insignificant. Despite being so large, the US economy continues to grow and produces ample jobs to ensure that the unemployment rate is among the lowest in the world.
Will the dollar lose value. Yes. But let's not get overly-dramatic ladies and gents. There is zero chance that the dollar will no longer be used as the world's reserve currency. In fact, I see more problems for European and British companies. Their goods and services are already uncompetitive with those from China. Now, they will become less competitive even with the US.
Indeed, the dollar would quote Mark Twain and say that -"The rumors of my death have been greatly exaggerated"!
1 comment:
I think there is no need to get excited about the decline of the dollar. It is likely to be temporary. Like you said, the main reason is that market expects the Fed to ease rates next year (whereas earlier it thought 6% by end of 2006 was very likely). Rates in the EU and GBR are likely to go up, though I think growth is no where close to being as robust as you have mentioned. The dollar has hit these levels before and there is no reason to be alarmed. Over time things will get reversed. For eg. weaker dollar would make US assets cheaper and US goods more competitive - both of which will support the dollar. A few months down the line, I wouldnt be surprised if the USD is back in strength. As the bankers say, returns on these assets are "mean reverting"!
-N
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