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Clear Thoughts
Here we go again, worrying about the dollar.
Originally Published Friday, December 17, 2004
| The fall of dollar impacts our day-to-day lives as well as many areas of our economy such as interest rates, international trade, and oil. How does the weakening dollar effect Clear?s stock selection process? |
The dollar, after all, has been the world's premier currency since World War 1. Most of America has known nothing other than the pride and certainty of having the planet's most important currency.
The present situation puts that perspective into some question. In Europe, the dollar is weaker, by more than a third, than it was only two years ago. This means a short while ago you could take ninety cents out of your pocket and buy a euro, while today, it would cost you $1.33. It means it costs a lot more to stay at a European hotel, eat on the Champs Elysee, or summer in Tuscany than it used to. Maybe our foreign trips will be less frequent. "So what" you say? "We can go to Disney World instead, and support America. That makes us better off doesn't it? Spend our hard earned money here, right? The dollar in our wallet feels almost the same as it did a few years ago, and it buys almost as many eggs as it did a few years ago. So what is the problem?
Take a look at the dollar from the other side of "the puddle." The weaker dollar also means that a European with one euro can buy $1.33 worth of a Broadway ticket. Or he could afford a better hotel room in New York, and he can go to Disney World. He can do this all at less cost than we can. Europeans now own Holiday Inn, Dunkin Donuts, and Amoco because our stocks look cheap too.
Part of the difficulty is that we are a ravenous nation of consumers. Relatively speaking, we're not producing as much as we used to, and we're still buying more goods. This could be a problem and potentially soon.
As a nation, we spend more money on imports than we make selling on exports. We also have the biggest money spending government and nation the world has ever known. This week the trade deficit hit an all time record. To pay for the spending of our dollars, some of which we do not have, we borrow from the rest of the world by selling bonds. Many of those bonds looked like they were 1/3 off to the buyers, because of the cheaper dollar. At the same time, though, a falling dollar may make our bonds look less appealing to foreigners because they may lose value against foreign currencies.
This brings us back to the interest rate issue. Rates are moving up. The Fed has raised short-term rates five times since June. Many economists believe that our interest rates must increase to attract buyers of our increasing debt. This essentially means that the price of money will go up. When the price of money goes up, that makes everything look more expensive to us.
Another contributing factor here is oil, the subject of last week's discussion. Oil represents 25% of our imports. If oil costs $44 a barrel, 30% more than it did a year ago, or more, and our wages at home did not go up this year, maybe we'd buy fewer items at Wal-Mart. Or we'd go out less frequently to eat. Or we'd skip the trip to Disney World. Oil alone can squeeze us.
To Europeans, oil looks like it only costs $33 a barrel, because oil is quoted in dollars. Much of the rest of the world has not experienced the same pain as we have with the price of energy going up, and the dollar going down.
Let us move on to China, another factor tied to the dollar. China's Yuan is in lock step with our currency. Because China produces and sells items to us at lower cost than we can make them ourselves, we spend and spend on Chinese goods. We send our dollars over there faster than we earn them. We spend it on TVs, Barbie dolls and other items essential to our lifestyle. China is another 25% of our import bill and we have a huge trade deficit with her. And we as a country borrow yet more to pay the difference.
Globally, evidence is mounting that the dollar is falling out of favor. Recently, Russia has increased its euro holdings by selling dollars in its reserves. So have the Saudis. OPEC holds 61% of its money in dollars, down from 75% three years ago. The trend continues.
This is not necessarily the end of the dollar's dominance as the world's currency. But a weaker dollar may foretell changes in our economy, in our wallets and in our investments.
Our computers scan the numbers of all U.S. listed companies and ADRs, and they process how a weakening of the dollar effects earnings globally, which is evident in the data. Our computers also tell us when good tidings hit the bottom line of strong companies wherever they may reside. We will keep you advised as these issues make changes to your portfolios.
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