Today we wade into the morass that is the U.S. dollar: Of all the chatter produced by Wall Street, this seems to be one of the more complex, contentious issues susceptible to misinformation. Let’s add our voice to the din.
We start out noting that 2003 was the worst year for the dollar since 1987 (an ominous parallel at best), with the euro gaining 20% versus the U.S. currency. Despite the best efforts of Japanese central bankers to weaken their currency (thereby strengthening ours), the yen was still 10% higher at the start of 2004 than it was a year prior.
Despite the assurances of John Snow, the U.S. does not have a strong dollar policy. The Secretary of the Treasury only seems to incongruously announce our “Strong Dollar policy” when ever the dollar makes fresh 52 week lows. In reality, the White House is happy to have the dollar drop. The weak dollar makes domestically produced goods and services appear cheaper to foreign buyers. And, as a debtor nation, we now pay off creditors with a medium of exchange (dollars) discounted 20% from when we borrowed it. A weaker currency also helps keep the threat of inflation at bay.
But if the U.S. doesn’t have a strong dollar policy, then who does? Japan and China. Their central bankers buy U.S. Treasuries, keeping our interest rates low, so American consumers can afford to buy their exports via credit cards (consumer goods) or bank loans (autos, durables). China, in particular, is able to maintain high employment levels.
It’s more of a mixed picture when we consider the dollar’s risks to the U.S. economy. As a debtor nation, we end up “depending on the kindness of strangers.” With nearly half of U.S. debt held by foreign holders, any change in the behavior of U.S. Treasuries buyers could have significant impact on interest rates. This puts an awful lot of leverage into the hands of foreign nations, who are likely to have a very different set of interests than us.
Perhaps the weak dollar’s biggest risk is the disappearing foreign investor. Consider the chart nearby: It’s the Dow Jones Industrial Index, priced in Euros. For 2003, the blue chips were flat. The SPX also went nowhere, while the Nasdaq gained 19%. If you were a European fund manager, would you want to buy dollar denominated equities?
Unless you have a different agenda, i.e., a central government subsidizing exports, that’s a losing trade; It may soon be a disappearing one also.