ArabianMoney.Net

First with Financial Comment from Arabia

Dollar now strengthening not weakening

with 2 comments

From the euro to the UK pound and the yen, the greenback is showing unexpected strength this year and mounting a comeback.

Indeed, if you look back 35 years as Bloomberg has just done then the relative strength of the US dollar is up by three per cent. By contrast the UK pound is down 34 per cent.

Of course, the real concern is purchasing power, not relative strength, although if the US was really in long-term economic decline then its currency would be following the route of the pound sterling and the lost British Empire.

Purchasing power

Purchasing power is also critically important to investors in the long and short term. At worst you want to see the purchasing power of your savings maintained, and preferably you want to see some addition to compensate for not being able to spend it.

On this reckoning then none of the major currencies has done very well. Inflation has eroded the value of money considerably since 1975. Money kept in a savings account would indeed have lost a great deal of its purchasing power over time.

The point for investors though is to make investments in the currency that is out-performing the others. At present that is the US dollar whose long bear market seems to have ended at $1.50 to the euro.

Now it is the eurozone that is revealed as less than perfectly formed with nasty public debt problems in Portugal, Ireland, Greece and Spain; and actually debt issues in France, Belgium and Austria are also highly problematic.

What comes next is likely a major correction on Wall Street, a big stock sell-off after the record rally since last March, and in fact this has been slowly happening since early January. This will further strengthen the dollar as investors sell US stocks and get US currency in return and also flee to US short-term treasury bonds.

Dollar weakness returns?

Could US dollar weakness then resume in the summer say? It is by no means clear as the debt problems all over the world are considerable, not just those piling up in America.

Surely the thing to watch out for is another slip in purchasing power as inflation picks up. For one sure way to eliminate debt is to have an inflation of the money supply. That is what happened in the 70s.

But then again deflationary forces will be powerful as asset prices contract again with a stock market correction, and this may hold back inflation for sometime. In truth, nobody seems to get currency analysis right but you should always be aware of the trends.

Buying gold and silver in place of dollars might well make considerable sense when the dollar rally seems done, and before an inflation starts. But good luck on the timing!

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Written by Peter Cooper

February 9, 2010 at 10:55 am

2 Responses

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  1. ‘I heard a rumor’ (good song) that the Germans will bail out the Greeks. Nice of them to be so generous. If it happens, you can bet that others will get in line for some coin. That could weaken the euro if a lot more debt is created. A lot of big financial brains are predicting dollar strength this year.
    As to the dollar, obewon is correct. I’m no optimist, but the dollar doomers amuse me. Most printed US currency is outside the country for a reason. Yes, it will go down in value over time, as it has done for the last hundred years. Just about all paper money does it. Yet, the people of the USA did pretty well during that time.
    The USA isn’t exactly Switzerland. It has nearly half the world’s best research universities, the rule of law, produces a huge food surplus, has the largest coal deposits, vast reserves of natural gas, cheap abundant wood, all the land you could want, no permafrost in the lower 48, 300,000,000 people, abundant fresh water, lots of minerals, iron, gold, uranium, and as President Lincoln said in the 1800’s, can’t be successfully invaded. We don’t even know what is in Alaska, (except vast coal beds). You think somewhere twice the size of Germany might contain some undiscovered valuable resources? I do.
    Right next door is friendly Canada with vast oil, potash, uranium, nickel, farmland, diamonds, hydropower, fresh water, and gold deposits.
    The euro doesn’t even have a real home. Sure, Europe is great, but it isn’t the USA. A lot more can go wrong there. A whole lot more. I wouldn’t sell all your dollars, just yet. The Venezuelans aren’t.
    And you might want to Google the ‘North American Water and Power Alliance’ to see what could be done in the future, if needed. Now THAT is a plan!

    Bill Simpson in Slidell

    February 10, 2010 at 12:10 am

  2. A currency is supposed to be a unit of value, or perceived value, and a medium of exchange. When we think seriously about a global currency for use around the world, there are only 3 at the present time.

    The USD, the Euro, and gold; the rest of the so-called currencies in the world can’t measure up, for a variety of reasons.

    All of the fiat currencies in the world, including the USD, are ugly now, due to massive (and continued) printing. Due to the significant and continuing downward pressure on the Euro, the least ugly fiat currency is the USD.

    So the USD will continue to be “king of the hill”… at least for most of 2010.

    Got Gold?

    obewon

    February 9, 2010 at 9:00 pm


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