Just in case anyone else has been worried about the dropping dollar, I came across this little article that actually has some reassuring news.
The dollar's dramatic slide is scary. It's part of a nasty downward spiral. The weak dollar is sending investors scurrying to commodity markets...oil, gold, grains and more...in hopes of earning higher returns. That fuels inflation, squeezing profits and consumers, discouraging spending and further weakening U.S. economic growth. The buck probably has further to slip with the euro rising past $1.60 and the yen likely to hit its highest level since 1995. But the dollar isn't in free fall. And there's little reason to fear a collapse. The U.S. economy remains structurally sound,though slowed. And if big global investors tried to dump much of their greenback holdings, the rest of their portfolios would crater. In fact, a healthy rebound is certain. The buck is already below a justifiable level. Something close to $1.40 against the euro makes a lot more sense, given the hard facts.
The big question is the timing of a rebound. It’ll take months...and a turnaround may be as far off as the end of the year. The key: Positive U.S. news, or at least a halt in the steady march of negatives. Investors need a reason to quit reacting to every drumbeat by shifting assets out of dollars into other currencies or commodities. Facts are the best antidote to psychology...the best way to fight fears. That should come this summer, with stronger third-quarter growth. Also needed: An attitude adjustment by the European Central Bank. Inflation remains its top concern, not the Continent’s sluggish growth. ECB interest rates won't drop...and they may even tick higher...as long as that's the case. And with the ECB and the U.S. Federal Reserve headed in opposite directions, the gap between the dollar and euro will widen. The Bank of England and the Bank of Canada, in contrast, trimmed rates, and the value of the dollar against the pound and loonie has stabilized. Eventually, inflation worries will ease, soothed by a combination of slow growth reducing demand for commodities and signs of a U.S. pickup. Meanwhile, the Fed is trapped. It can't halt the dollar’s drop. In fact, its efforts to buoy economic growth only feed the decline. Interest rate cuts make the euro and other currencies more attractive and also increase liquidity, fueling inflation and that downward spiral.
Bottom line: The fall isn’t over, but there’s no need to panic.
Via the Kipplinger Letter.
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2 comments:
When I start to feel stressed by the pathetic dollar, I think "But it doesn't matter! I get paid in pesos!" Then I remember that my Chilean salary is still laughable compared to even my lowest-earning friends' salaries back home and that if they came to visit me they would still be rich in comparison. And then I feel just generally poor :(
Although realistically, I was talking to my dad about the sad state of the dollar and he basically made the same points as this article - essentially that the world can't let the dollar get tooooo low because it's the currency that we've used as the basis of the global economy. So we should all be ok in the end! And for the moment the Brits can rejoice in the ever-stronger pound!
AHHH, it does stress me since I get paid in dollars!!!
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