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http://www.marketwatch.com/investing/index/DXY For the past year the U.S dollar has steadily been losing value to other currencies. The DXY (a futures index that tracks the dollars value to a basket of currencies) chart shows it testing the 75 level, a level that has shown strong support over the past 5 years.
My question is then... Is it a problem that the U.S dollar is becoming less valuable, and do you think it will recover?
I do believe this is a problem depending on what currencies we are comparing the U.S. dollar to. It would greatly concern me if the U.S. dollar depreciated against currencies from countries that are major trading partners with the U.S. (China, Canada, Mexico, etc.) because of the loss profits to American businesses. I'm also interested to see how the recent earthquake in Japan will ultimately affect the exchange rate between the U.S. dollar and Japanese yen in the next few years.
ReplyDeleteI'm not sure as to when it'll recover but the graph above shows a pattern the past few years with the fluctuation of the DXY between the 70-90 level. I'm not saying that history always repeats itself but the DXY level should increase within the next year if recent history is any indication.
There are some advantages to a weakened dollar. For instance, a weak dollar means that American products are cheaper for other countries, so exports increase.
ReplyDeleteUltimately though, I think this is a serious problem; mostly because of the reasons why the dollar is weakening.
Because the US spends way more than it takes in from taxes, we have to sell off debt in order to survive. Interest is paid to the buyers.
But, with the declining value of the dollar, investors (aka China and other countries) stop buying our debt. Uh oh...
This forces us to monetize the debt instead. The US continues to print money in order to pay off debts, which increases the supply far too much and devalues the dollar even more as a result.
The USD hit a 6 month high against the Yen last week, and a 5 month low against the Euro today. I think currency is mostly cyclical for the industrialized economies. If you look at DXY over the last 5 years, there are several upward and downward trends, but it has been relatively unchanged over the time period.
ReplyDeleteI think that during the crisis, much of the world found comfort in the perceived safety of the USD, and now that the world is coming out of the crisis, there will be less volatility as more stable, long-term currency exchange rates are generated by market activity.
I think over time and (as Jared said) as the world comes out of the crisis the dollar will eventually become more stable. However the way the US currently treats its money supply (or lack their of) we continue to depreciate the dollar's value. We wont truly know what will happen with the dollar until we are able to pay off our debts.
ReplyDeleteI think it is a problem because even if exports increase not much is actually made in the USA anymore and so we really aren't getting much advantage from a weakened dollar. I also think that it affects our standard of living a lot as well as our savings. As the value of the dollar decreases it takes more money to buy things we deem necessary to survive and if the economy remains similar to what it is now then we will need to save longer for the things we want.
ReplyDeleteOn a micro level, the depreciation of the dollar may be a good thing for speculators who can short the dollar as it depreciates against other currencies.
ReplyDeleteI agree with everyone's comments about the short term versus long term effects of a weakened dollar and also agree that as we emerge from this financial crisis, the dollar will likely stabilize.
I hope Jared is right and this is just part of a normal cycle. It can be pretty scary though especially if the decreases continue. This is another reason a globally diversified portfolio is important, as well as one with hedges against inflation.
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