Wednesday, February 27, 2008

Dollar Still dropping (Feb 2008)

Just over a year ago I wrote that if you want to know how America is doing economically, watch the value of the dollar. Well, as of yesterday the dollar has reached a new post WW-II low against foreign currencies.

The Euro was established in 1999 and at at that time the value of one dollar for one Euro was established. Ss of yesterday it cost $1.4981 in Dollars to buy one Euro. Here is the Bloomberg Report:
Feb. 26 (Bloomberg) -- The dollar sank to a record low against the Euro as U.S. home prices and consumer confidence tumbled, bolstering bets the Federal Reserve will keep reducing interest rates.

The U.S. currency declined to the weakest level since the Euro began trading in 1999, and slumped against all 16 of its most-active counterparts. It reached its lowest level of the day after Fed Vice Chairman Donald Kohn said turmoil in credit markets and the possibility of slower economic growth pose a ``greater threat'' than inflation.

Kohn's comment ``confirmed the Fed will keep cutting interest rates,'' said Adam Boyton, a senior currency strategist in New York at Deutsche Bank AG, the world's biggest currency trader. ``That brought more downward pressure on the dollar.''

The dollar weakened to $1.4981 per euro at 4:32 p.m. in New York, from $1.4830 yesterday, falling past the previous historic low of $1.4967 set Nov. 23. The U.S. currency dropped to 107.24 yen from 108.07, and has lost 4 percent this year.

Boyton forecasts a dollar drop to $1.55 per euro in the next three months. He's more bearish than the consensus. The dollar will rebound to $1.48 per euro by the end of March and to $1.40 by year-end, according to the median forecast in a Bloomberg News survey of 41 analysts.

The U.S. currency has lost about a quarter of its value in the past five years, according to the Fed's U.S. Trade Weighted Major Currency Dollar index, which comprises seven currencies of U.S. trading partners. The weaker dollar has made U.S. goods cheaper abroad, boosting exports to a record and shrinking the nation's trade deficit last year for the first time since 2001. [Snip]

`Bleak Assessment'

The U.S. currency extended declines after Kohn, speaking in North Carolina, said ``the adverse dynamics of the financial markets and the economy have presented the greater threat'' to the U.S. economy than inflation.

``Kohn painted a very bleak assessment of the U.S. economy,'' said Brian Dolan, research director at, a unit of online currency trading firm Gain Capital in Bedminster, New Jersey, which has about $250 million funds under management. ``What he indicated is that the Fed will keep providing lower interest rates regardless of inflation. It's outright dollar- negative.''
The rest of the world is watching as the U.S. economy becomes less and less economically competitive against Europe and Asia. The Federal Reserve is now promising to lower interest rates to spur the economy in spite of the threat that such lowering of interest rates will cause an increase in inflation.

The lowered interest rates are all the Fed can do, but they are a short term fix, while the inflation that will result is a longer term threat. At some point, lenders will start anticipating the inflation and increase the interest they charge for loans. That's already happening in the long term mortgage markets. In spite of the recent actions by the Fed to lower interest rates, mortgage rates have not gone down.

In spite of all the happy-talk about how strong the U.S. economy is, there is little evidence to support that talk. That's what the drop in the value of the dollar is telling us.

For some of my previous economic reports, go here.

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