The views expressed in this column are solely those of the author and do
not reflect the views of SVB Financial Group, or Silicon Valley Bank,
or any of its affiliates.
The dollar is at a new 18-year low and no one seems to be
upset. There are no headlines, no demonstrations, no scathing editorials. The
issue has not even been pulled into the domestic political arena by politicians
decrying the demise of one of the most enduring symbols of the United States.
Our trading partners overseas have also been very reticent to comment about an
unfair currency policy. What is going on? Doesn't anybody care? Or, is it
possible that a lower dollar is currently good for everyone?
that the correct terminology is a lower dollar not a
weaker dollar. The Fed has been pursuing a "strong dollar"
policy since Treasury Secretary Rubin was in office, and this semantic nuance is
partially valid. The current value of the dollar is not due to it being weak, it
may have become relatively weaker than many other currencies, but it is not
weak. Really......It is just relatively weaker than it was before now and before
that it was relatively stronger than it had been before that, and......that's
how it goes.
Some of the advantages of the current level of the dollar
are more obvious than others. For the U.S., trade is the easiest to see — our
exports cost less in foreign currency and imported goods from abroad are more
expensive. So the U.S. is exporting more and importing less, which should lead
to a better trade balance, which in turn will have a positive impact on the
current account balance.
What about other countries? What's in it for
them? Anything? Yes, commodity price increases for most other countries have
been moderated by the dollar's decline. Crude oil prices have risen more than 50
percent since the beginning of 2010, from roughly $75/barrel to $114/barrel.
Simultaneously the euro has risen from $1.19/euro to $1.45/euro. This means that
in euro terms, oil has risen from EUR63/barrel to EUR78/barrel, or 24 percent,
versus the 52 percent rise in dollar terms. The same dampening effect is true
across the board for all commodities — from wheat to iron ore — which are priced
in dollars. This helps to keep foreign consumer and producer prices (inflation)
from rising too rapidly. This effect has contributed to the ability of the euro
zone to keep their interest rates low for longer than they normally would have
been able to do, which has helped to stimulate economic growth
Given the current circumstances, monetary policy in both the
United States and foreign countries is also being favorably impacted by the
lower dollar. The U.S. economy is being stimulated — similar to the effect of a
monetary easing or lowering of interest rates — by the increase in export
related economic activity. The increase in import prices has been a welcome
contribution to U.S. inflation, particularly as the threat of deflation was very
real for a time. As U.S. rates are already as low as they can go in a practical
sense, these effects are providing additional stimuli with lowering rates. In
Europe the opposite effect is taking place and is equally useful there. The euro
zone's inflation and growth would have probably resulted in a rate hike in the
past, but the current peripheral debt situation makes any rate hike very
problematic. The higher euro has made export prices rise, slowing demand for
European products which slows the economy. Additionally, the lower import prices
in Europe, which the euro's rise provides, are preventing inflation from rising
at an even higher rate.
Other than the positive effects for the U.S. and
Europe, the list of reasons for lack of complaints must include one of the major
reasons for the lower dollar. This is the shift in the reserve policy
(composition of the FX reserves) of a group of central banks, primarily Asian.
The apparent increase of reserve diversification (Read: selling of USD), has
been a steadily increasing weight on the dollar and this, in the absence of
sufficient fundamental factors or sentiment, has determined the market's
direction. Now, with European economic fundamentals improving more rapidly than
those in the U.S., these flows are accelerating the dollar's decline. In some
instances the selling is almost a vicious circle. Several Asian currencies are
appreciating so rapidly against the dollar that the central banks of these
countries are intervening regularly in their local currency market (most of
these currencies are not freely traded) to slow down the appreciation. They sell
their local currency and buy dollars in the domestic market and then — since
they are trying to either reduce or maintain the amount of dollars they have —
they sell the dollars in the international market and buy euros, yen or pounds.
This then weakens the dollar, which put more upward pressure on their local
currency and off they go again. So, in effect, the countries which export the
most goods to the U.S. are also pushing the dollar lower.
outlook for the USD appears to be one of continued downward pressure. The higher
rates of economic growth in Europe and Asia will keep the monetary policy in
these regions tighter than that of the U.S. for the immediate future. This is a
negative factor for the dollar and, until the Fed signals that growth in the
U.S. has reached a level where they feel they must tighten monetary policy, it
will remain difficult for the USD to appreciate. Another likely dollar negative
will be the upcoming raising of the Federal debt ceiling, it looks like the
debate will be highly politicized and will probably not be confidence inspiring
either in terms of the willingness of the leadership of the political parties to
compromise or the value of the dollar for next three to six months.
The thing to remember is that the value of a currency is
relative to the value of other currencies and that it's not automatically good
to have an appreciating currency or bad to have a depreciating one. Also, it's
misleading to link the current status of the dollar to the potential loss of its
status as the worlds' dominant reserve currency. The diversification of reserves
globally started years ago and the current increased pace of dollar sales should
be viewed as a lagging indicator of the growth of the relative financial
importance of Europe and Asia, and not as a leading indicator of the decline of
the United States.
The dollar is currently undergoing an adjustment in its
relative value due to the past financial excesses of the United States and the
concurrent growth of other large, competitive economic powers. The situation
could certainly be better, but it is not a crisis, and the dollar is not a weak
The views expressed in this column are solely those of the author and do not reflect the views of SVB Financial Group, or Silicon Valley Bank, or any of its affiliates. This material, including without limitation the statistical information herein, is provided for informational purposes only. The material is based in part upon information from third-party sources that we believe to be reliable, but which has not been independently verified by us and, as such, we do not represent that the information is accurate or complete. The information should not be viewed as tax, investment, legal or other advice nor is it to be relied on in making an investment or other decisions. You should obtain relevant and specific professional advice before making any investment decision. Nothing relating to the material should be construed as a solicitation or offer, or recommendation, to acquire or dispose of any investment or to engage in any other transaction.
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