The US Dollar Continues to Struggle

Us poor Americans.  Our US dollar continues to be the whipping boy of the currency market. As I have discussed earlier in this blog, I think that there are several reasons underpinning the weakness of the dollar.

1.  Oil prices. While I feel that there is a certain amount of speculative fluff in the current dramatic rise of oil prices, the reality is that oil is purchased in US dollars, and as long as oil prices trend upward, this puts pressure on the US dollar. We have seen prices cross the $100/barrel threshold and head close to $150/barrel, all in the last 6 months.  There is no current shortage of oil, but continued unrest in the Mideast region, including the Iran/Israel threats, and the war in Iraq continue to make an assured supply of crude an uncertain prospect at best.  Couple this with unprecedented demand from emerging countries like China and India, and the picture gets even more fuzzy.

2.  Our economy. The current credit market crisis continues to weaken the chances for an economic rebound at home in the near future.  No one will say we are in a recession, but the reality is that the economy is in dire straits, with the housing market decimated, the banking industry in shambles (today the US announced that it may have to rescue Fannie Mae and/or Freddie Mac from insolvency), the airline industry is planning huge employment cutbacks this fall, and we haven’t yet hit bottom. This does not inspire confidence in the international investment community.

This weekend, IndyMac was shut down by Federal regulators.  This represents one of the largest bank failures in US history.  Teetering on the edge are Washington Mutual and National City.  Both banks have a significant amount of their assets in sub-prime mortgages. I suspect the situation will worsen before it gets better.

3.  Interest Rates. Money flows to the area of highest return.  The US is caught between a rock and a hard place.  It has finally signaled an end to the lowering of interest rates, but a return to increasing rates, which would make the dollar more attractive, would further hamper any near term prospects for a housing recovery.  Further, inflation poses a serious concern, both here and abroad, with the dramatic increase in costs of basic food supplies and raw materials such as steel and copper.

The good news is that the Fed has indicated that they are now watching the dollar more closely, and are prepared to shore up its value should it continue its precipitous decline.  I think their benchline is somewhere in the $1.60/euro range, but I could be completely wrong.

Future Prognosis: In the short term, the currency experts are bearish on the dollar, which signals further weakness.  Longer term, the prospects may be brighter, but only if positive action is taken to get our own economic house in order.

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