It is here

[Wildbill]

I don't think there is any doubt a rout of the dollar is upon us. Only thing holding it up right now are the Chinese and Japanese, the same people we were bitching about so vehemently only last month. They are the only protectors from us getting hammered badly, they are not only supporting the dollar against their home currencies, they are supporting the dollar/Euro as well. It is playing out exactly as I felt it would, eventually traders would see nothing but a one-sided trade where they either don't go anywhere or make money. They know the US won't do a thing to protect the dollar so why worry about betting against it?

All those people that whined about the Asian protectionism will be thanking those people from keeping the world's financial liquidity from collapsing because frankly who is willing to back the dollar right now? If the dollar collapsed it would hurt the US, but hurt the rest of the world just as much. These evil Chinese and Japanese will slowly be seen as the good guys...

[squiffy]

I am not sure what you mean. While there is always a small chance that the dollar will continue dropping, ad infinitum, more likely it will eventually find a floor. As the dollar gets cheaper, U.S. goods are cheaper and demand for U.S. goods will increase. If U.S. companies sell more goods overseas they will buy more raw materials and hire more workers in manufacturing and transportation and shipping.

As companies reinvest more profits in production, the U.S. economy will improve (barring 911 type attacks or an out of control budget deficit due to defense spending or just plain bureaucratic waste). As business borrow more to reinvest, the demand for credit will increase and interest rates will rise. In addition, as the economy heats up the Fed will gradually start to raise the prime rate.

As interest rates rise and as the U.S. economy improves more foreign investment will be attracted to the U.S. and the dollar should rise.

Barring extreme situations like major depressions or recessions, etc., the health of the economy is cyclical and the value of the dollar is probably cyclical.

No one wants to buy dollars if interest rates are low. Why invest here when you can get higher interest in other nations.

But as interest rates rise and as the economy improves foreign companies and investors will want to buy dollars again.

I'm more concerned about what Brittany Spears will be doing next than about whether the dollar will recover its value relative to other currencies.

[Ray Zee]

you are entirely right from an economic standpoint squif.
but that takes into account that we can sell our goods by producing something cheaper and better than can be found elsewhere. that may no longer be the case. so the dollar can fall very far down begfore finding its bottom.
our economy was founded on our production after ww11. but it has changed more toward a service economy and thats good as production has shifted to lower cost labor countries. next that will be attacked from abroad and will suffer. it is all part of the dying off of empires.

[adios]

FWIW from what I understand there was a rumor on the street that the EU central bank (forget the next name) was starting to buy US $ today. Also from someone I consider very knowledgable stated that when the Euro trades at 1.20+, US exports start really hurting European competitors. He also stated that even though the EU needs to take measures to stimulate growth in Europe that he doubts that they will due to their great aversion and fear of inflation.

[Wildbill]

Go ask Argentina what they think of this. Yep the peso found a floor, but half the people were below poverty level by the time it happened. Now their exports are booming to the point that the government makes a lot of money out of exit taxes and no one cares, because they are still making a lot of money. The currency went way too far. No I don't think an Argentina meltdown is coming, but I do know that it is hard for a lot of demand for US product to materialize when China's exchange rate is pegged and we just plain don't ship a lot of stuff offshore anymore. Much of our production is intellectual and in services and also in very large capital goods, things that don't compete as much with other products. While I would never say let us all go back to being a manufacturing or even farm-based economy, this is a distinct weakness in a situation like this. And once again I back the story that we won't fall too far nor will the world's capital markets seize up because believe it or not China and Japan, plus the ECB will come to our rescue. I just find it deliciously ironic that blue-blooded Americans are whining about Europeans and the Asians and don't realize how they still could very well save our bacon.

[adios]

Points well taken and I would also add that I think that it's in their best interests to have our bacon saved. What I find interesting and ironic is that it seems that ultimately they'll be financing much of our budget deficit by buying US treasuries with the US $ they purchase.

[AceHigh]

A weakening national currency is usually bad for a country and always a tricky situation.

Developed countries' economies depend on buying unfinished products/raw materials from undeveloped countries and turning them into expensive finished products that others will pay a premium for. If the currency is too low the raw materials become too expensive and drive up the price of finished products, reducing pay for workers and management. In much the same way the Steel Tariffs hurt the US economy by driving up the costs for industries that use steel.

[GeorgeF]

The euro started out at about 1.2 euro/$, since the europeans set it at 1.2 I doubt 1.2 is a problem. When the euro fell there were near riots by truck drivers. If the euro keeps rising expect them to use energy and commodities more intesively and expect them to get the best scientists doctors ect from abroad. Also expect the europeans to purchase assets in foreign countries. They also can use the money to rebuild eastern europe, which really needs rebuilding. Their aging population will need foreign nurses, health workers. I see the strong euro as an advantage if used correctly.

[squiffy]

Wait, wait, wait. The dollar is weakening relative to certain industrialized European nations (Euro) and Japan (Yen). Not as to all currencies in the World.

If we buy coffee beans from Guatemala or Costa Rica or raw cotton or fabric from India we may still be getting a good price on raw materials.

If the dollar is weak then most U.S. goods will be cheap overseas. And there are many goods we produce using resources from the United States which we do not necessarily have to buy from overseas.

You are right that a weakening dollar may make certain raw materials more expensive to purchase, but it may make U.S. goods cheaper overall. And the I think the latter effect is generally the stronger of the two effects.

That's the effect commonly associated with a weakening currency when discussing Japanese imports/exports vs. U.S. imports/exports.

And many of our major trading partners are other industrialized nations. So if our raw materials are a bit more expensive, that may be more than offset by the fact that our labor costs are reduced vis a vis other industrialized nations that buy our processed goods.

U.S computers and cars will overall be cheaper overseas, even if some of the raw materials are more expensive, because a huge percentage of the cost is our profit and the cost of U.S. labor.

[AceHigh]

Some OPEC countries are starting to price oil in euros instead of US dollars.

[GeorgeF]

"U.S computers and cars will overall be cheaper overseas, even if some of the raw materials are more expensive, because a huge percentage of the cost is our profit and the cost of U.S. labor."

The nightmare is that the europeans outsource to Brazil not the USA. I remember the 70's when both the US$ and US manufacturing where weak.

[Ray Zee]

many years back most here wont remember but germany was know as having the highest quality products. you always looked for something german made if it was a tool or something intricate. now they dont produce much of anything better than anyone else. boils down to production costs which come from salaries and benefits. so it has moved elsewhee. we are still near the top but falling fast. expect other deloping countries to far outpace us in the future. like it or not.

[AceHigh]

[ QUOTE ]
that may be more than offset by the fact that our labor costs are reduced

[/ QUOTE ]

No, labor costs remain constant, because labor is paid in our currency. Currency fluctuations don't affect home grown labor or products. Unless the increase costs of forein materials allows local producers to also increase there price for the materials.


[ QUOTE ]
U.S computers and cars will overall be cheaper overseas,

[/ QUOTE ]

No, we will be paying 40% more, or whatever the difference in rates is for the components from outside the US. That only works for products where most or all of the parts are all from the USA.

America's economy is one of the most stable in the world because the dollar is usaaly strong and in demand. What happens to that stability when other countries demand to be paid in Euros? Companies can't reasonably predict what prices the will have to pay for goods and services.

Uncertainty increases risks for companies and investors.

[AceHigh]

[ QUOTE ]
now they dont produce much of anything better than anyone else.

[/ QUOTE ]

What 'bout luxury automobiles?

[Wildbill]

Many cars made by BMW and Mercedes are built in Alabama and South Carolina now. The highest end are still in Germany, but their sales levels are very low compared to the mass market models that aren't made in Germany anymore. And Volkswagen makes all their lower end models in Mexico. Shows how manufacturers when they must compete on price are willing to send their plants overseas, yet when it is a top luxury product they still keep it at home. That is what the US is as well, the top products stay at home, the more mundane stuff is getting shipped off. Boeing will do that more and more, so will big capital goods makers like Catepillar.

I do remember when Germany was the place to get top quality stuff and I do remember when people thought they were going to take over the world's markets. Japan had a time in the sun as well. The US comes and goes in cycles, there is always a new challenger. The big difference though is the US is extremely dynamic and always retools. In the early 80s most people figured some of the big automakers would be out of business, but they found a way to stick it out and find better times with new business models. That is how the US economy survives at the top and will keep surviving.

Japan and Germany now? They are still doing the same things. Sad to see such powerhouse economies limping along and holding up the world's growth potential really. Japan still thinks it can be an export power, paying no attention to the fact that they have the most expensive costs in the world. Germany thinks they can demand premiums for their quality products while not being terribly productive. The rest of the world just about matches their quality with far better productivity. And I still don't think either is willing to accept this truth.

[AceHigh]

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Many cars made by BMW and Mercedes are built in Alabama and South Carolina now

[/ QUOTE ]

The cars are only "assembled" in the US. The parts are built overseas. This is to keep more of there cost known, so when the dollar drops or rises it affects them less. Many Japanese companies are the same way.

A lot of Germanies problems can be traced to there reunification. East Germany contained too many unskilled laborers who could not easily be assimilated into the economy. Germany's social services are very kind to the hard core unemployed and many of the former East Germans needed these services. As long as unemployment was low, Germany could allow these services to be very generous. Now that unemployment is high, the drag on the economy is too heavy to overcome.

So I don't think the German worker or products has slipped as much as people think. The Germans have had one of the dominant economies in Europe for hundreds of years. I think most of the problems in Germany have been brought on by the overspending/mismanagement of the government.

[AceHigh]

[ QUOTE ]
In the early 80s most people figured some of the big automakers would be out of business, but they found a way to stick it out and find better times with new business models.

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Like Chrysler, now DaimlerChrysler? They were acquired by Daimler-Benz.

[Wildbill]

Not at all, I mean out of business Chapter 7 style. Their turnaround to profitability was what got them bought out and now Daimler is driving them into the ground again. Put it this way, if you were an owner of Chrysler in many times in its long history, getting bought out as they did was a major success.

[FredJones888]

I agree, but I have been long gold over a year as well, so my purchasing power is not evaporating like that of other americans. Basically something has to give in order to reduce the trace deficit and that thing is the dollar.