The Future of the US dollar and it's effect on the US economy

[Art]

This thread is to discuss the likely future trend for the value of the USD, it's continuing role as the world's major reserve currency and the likely impacts on the US economy.

To kick it off here's a few interesting reads from the past few days;

US dollar takes a pounding over deficit

Financial Times News - The US dollar suffered a severe sell-off on Friday, taking it to its weakest level against a trade-weighted basket of currencies since October 1997, as fears about the US current account deficit crossed world markets.

http://news.moneycentral.msn.com/provider/providerarticle.asp?feed=FT&Date=20060512&ID=5717754

A weakened dollar means more expensive imports leading to inflation, leading to higher interest rates which in turn leads to recession...

The dollar fall is likely to be compounded by politically inspired moves to reduce the worldwide demand for the greenback

The Associated Press/LONDON

Chavez may price oil exports in euros

MAY. 16 7:09 P.M. ET Venezuela's president Hugo Chavez said Tuesday that he would consider pricing his country's oil in euros instead of dollars in line with a similar declaration made by Iran.

Earlier this month Iran's state television reported the country's Oil Ministry granted a license for its first euro-denominated market.

"That is an interesting proposal made by the president of Iran," Chavez told Britain's Channel 4 news. "We are free to choose too between the dollar and the euro."

http://www.businessweek.com/ap/financialnews/D8HL5NS01.htm?campaign_id=apn_home_down&chan=db

Russia to set up oil-product exchange in 2006 - official
11:01 | 15/ 05/ 2006

MOSCOW, May 15 (RIA Novosti) - An oil-product exchange will start operating in Russia by the end of 2006, a deputy economics minister said Monday.

In his state of the nation address on May 10, President Putin said Russia, as a leading world oil exporter, had to set up its own oil exchange to trade crude and petroleum products for rubles.

Kirill Androsov, the chairman of a government task force on launching oil and petroleum product-traded exchanges, was upbeat about the timeframe for opening the bourse: "The oil-products exchange will open by the end of the year."

Androsov said that although work was being conducted in parallel, it was easier to organize an exchange for petroleum products rather than export oil as there were many buyers and that state purchases could boost the process.

The deputy economics minister said Russia could set up an exchange to trade in oil export by the end of 2007.

http://en.rian.ru/russia/20060515/48107520.html

With several of the world's largest energy suppliers moving away from the USD the need for their customers to hold large USD reserves is greatly reduced with potentially very serious repercusions for the US economy.

 

[Polly]

The dilemma of Bernanke is of course to defend the value(:uhh: ) of the USD and retain the attractiveness of T-Bills, he will have to raise interest rate even to unimaginable height, at the cost of bursting the already sagging property market bubble and possibly jarpardising along the way the heavily geared banking system. Basically plunging the economy and the financial system to an abysmal pit.

This prospect, dreadful as it may be, would at least contain in it the hope that position of the USD as the reserve currency will be salvaged. The question is does he have the courage to make this hugely unpopular decision?

The forex and commodity markets seem to have seen through him and are betting on an inflationary monetary policy and substantial depreciation of the greenback instead. Even the Chinese government who has an vested interest in seeing a stable Dollar is becoming nervous and quickening its steps towards exchange liberalisation, no doubt in an effort to cut down on its reserve losses as a result of such prospective depreciation.

 

[SOS2008]

The dilemma of Bernanke is of course to defend the value(:uhh: ) of the USD and retain the attractiveness of T-Bills, he will have to raise interest rate even to unimaginable height, at the cost of bursting the already sagging property market bubble and possibly jarpardising along the way the heavily geared banking system. Basically plunging the economy and the financial system to an abysmal pit.

This prospect, dreadful as it may be, would at least contain in it the hope that position of the USD as the reserve currency will be salvaged. The question is does he have the courage to make this hugely unpopular decision?

The forex and commodity markets seem to have seen through him and are betting on an inflationary monetary policy and substantial depreciation of the greenback instead. Even the Chinese government who has an vested interest in seeing a stable Dollar is becoming nervous and quickening its steps towards exchange liberalisation, no doubt in an effort to cut down on its reserve losses as a result of such prospective depreciation.

If yesterday's stock market is any indication, it would seem so (anticipation of increased rates and inflation).

 

[Astronuc]

There comes a point when raising the interest rate, which increases the cost of money, actually constributes to the increase in inflation - and that is already occurring.

Debt in the US is growing faster than the ability to repay it. If interest rates increase and the dollar values decreases, that could very well cause a recession.

 

[Gokul43201]

This is only indirectly related to the effect of the dollar on global markets, but in the two days following the big dip in the US stock market, Indian stocks came crashing down by a whopping 12%.

 

[SOS2008]

Cheneys betting on bad news?

A look at the president and vice president's financial disclosure forms.
By Kiplinger's Personal Finance Magazine

Vice President Dick Cheney's financial advisers are apparently betting on a rise in inflation and interest rates and on a decline in the value of the dollar against foreign currencies. That's the conclusion we draw after scouring the financial disclosure form released by Cheney recently.

For more details - http://articles.moneycentral.msn.com/Investing/Extra/CheneysBettingonBadNews.aspx?GT1=8283

 

[Gokul43201]

Vice President Dick Cheney's financial advisers are apparently betting on a rise in inflation and interest rates and on a decline in the value of the dollar against foreign currencies.

Who isn't? I'd be highly skeptical of anyone that confidently projected otherwise.

 

[SOS2008]

Who isn't? I'd be highly skeptical of anyone that confidently projected otherwise.

True. But if you were wealthy and could protect your investments the way certain policy makers do, you wouldn't care so much, right? For the rest of the people out there, rising inflation and interest rates means they may have to make certain sacrifices, and they can say good-bye to the American Dream of owning a home.

 

[Polly]

That is why it is all the more urgent for anyone with savings, stocks and property denominated in USD to divest them to foreign currencies and precious metal. So that while your current income may dwindle in purchasing power, your seed money will grow.

 

[SOS2008]

That is why it is all the more urgent for anyone with savings, stocks and property denominated in USD to divest them to foreign currencies and precious metal. So that while your current income may dwindle in purchasing power, your seed money will grow.

Well at least diversify and/or hedge. I wouldn't buy any stock until after the 2006 elections, and maybe not until after the first of the year. I'd consider commodities along with precious metals. I'd buy real estate if it is already discounted at least 6% (what the drop in appreciation is anticipated to be), because interest rates may go higher in fall.

 

[rcgldr]

Regarding precious metals, the USA has demonstrated it can manipulate the prices of these. Take the case of gold, when oil producing countries wanted to be paid in gold, the price rose to over $800 / ounce. It took a while but the price slowly dropped to below $400 / ounce. Now there are efficient mining companies that can shut down and re-start when ever gold hits a certain price mark.

 

[rcgldr]

Regarding trade deficits, USA consumers get products, while foreign countries get to hold green pieces of paper. This can only go on for so long. Eventually that money outside the country will end up getting spent in the USA. In some cases it's led to rediculous prices on commercial real estate, like golf courses, hotels, ... but this eventually backfired due to competition from the properties still owned by USA companies limited the price of renting.

In my opinion, the US dollar is backed up by guns (our military power) and not gold, and the general faith of the USA population, which is partially based on the propanda we get in our news. The USA also leverages a lot of power through it's gifts of money to many foreign countries. Could Israel even exist without our support? Strangely we give similar amonts of money to arab based countries as well. Still the ultimate threat is the USA's military power.

The USA and some other wealthy countries only require a small portion of the population to produce the basic needs, like food, clothing, shelter, and transportation. The issue is that this means that most of the working force in these countries are doing "non-essential" work, so the economy can fluctuate greatly, merely on the perceived well being of a country, not the actual condition.

 

[Gokul43201]

That is why it is all the more urgent for anyone with savings, stocks and property denominated in USD to divest them to foreign currencies and precious metal.

Hmmm...sounds diabolical.

 

[Polly]

Yeah, I kept forgetting the rate of savings in America is below 0.

:uhh:

http://www.bankrate.com/brm/news/sav/20060308a1.asp

 

[SOS2008]

Yeah, I kept forgetting the rate of savings in America is below 0.

:uhh:

http://www.bankrate.com/brm/news/sav/20060308a1.asp

Good links. It's true that baby boomers are spending too much to ensure their children have a good standard of living now and in their future. These parents better hope their kids reciprocate and will help take care of them when the have to retire.

So what foreign currency do you recommend? The Euro, Yuan, a mix?

 

[Polly]

Sorry SOS, for the long delay . No one has ever asked for my view on foreign exchange :shy: , so I thought I'd better think carefully before I open my big mouth. Yes I think they are a good mix. I also find when to buy is almost as important as what to buy, and that "money is made in the waiting". Good luck.