American Dollar Downtrend Accelerates

Friday was a day that the American Dollar really got pounded on foreign exchange markets. The US Dollar Index closed at 77.69, a new all time low.

Vice President “deficits don’t matter” Dick Cheney seems to once again be very wrong. But what would you expect from a man who reportedly wants the US to attack Iran after achieving such stunning “successes” in Iraq and Afghanistan? However, one does have to give the man credit for being consistent with his views and pronouncements. Not one has yet to match up with the facts.

The world foreign exchange trading community, the one that really matters when it comes to currency exchange rates, seems to think that deficits without end, reckless spending, constant expensive warfare, and the creation of money from thin air do matter.

Foreign exchange traders are being as democratic as one could ever hope for in expressing their opinions about American policies by voting with their currencies.  Votes are cast by selling Dollars and buying Euros, Swiss Francs, Yen, Canadian Dollars, Australian Dollars, and even Thai Baht and Brazilian Reals. Then there is gold and silver.

All of the above are in major up trends while the poor USD is getting clobbered. Ever since the USD broke 80 on the USD Index the downtrend has accelerated. While not yet quite a collapse the threat of a destabilizing Dollar collapse is real and perhaps not far away.

As an American why does a weak Dollar matter to you? For one important thing a collapsing USD would lose its status as the world’s premier reserve currency. The privileged status that the Dollar has enjoyed since WW II has made it easy for the US to finance vast amounts of debt. This ability to constantly pump up the money supply has most certainly contributed to the growth of the American economy.

Should a rapid collapse of the Dollar lead to its loss as the preferred reserve currency around the world the US will have great difficulty in financing its bloated requirements at reasonable interest rates, if at all. The result will be a sharp increase in US interest rates, the contraction of business activity, and a clear and present danger of a depression, not only in the US but around the world.

Should the US somehow be able to avoid the worse that could happen from a Dollar collapse there will still be unpleasant consequences. Americans who travel abroad have already experienced a roughly 20% increase in expenses over the past year as the Dollar continued its fall. For example, with one Euro now worth about 1.4250 Dollars it has become painful for an American to travel to Europe. That means you will receive only about 0.7017 Euro for each Dollar that you exchange.

For those Americans who live overseas but depend on income earned in Dollars or pension and social security payments  the fall of the Dollar has already added to their cost of living by 20 to 25% over the past year or two.  This makes life particularly difficult for retired Americans who are on fixed incomes denominated in US Dollars.

A result that will effect far more Americans will be the increased prices that will be paid for imported goods. Further decreases in the worth of the Dollar will only add to inflation at home. This is coming at a time when Americans are experiencing DEFLATION in the value of their homes as the poor state of the housing market pulls the entire economy into recession. Higher long term interest rates caused by a rapid decline of the Dollar will only make matters worse.

Americans only become poorer as foreigners are able to buy American businesses and assets at fire sale prices by using their strong currencies. The stream of income that these businesses produce will largely benefit the foreign owners, not American workers.

It now appears that Americans are about to experience financial conditions that would have been considered impossible not that long ago. We will likely see INFLATION in food, energy, and imported good prices while experiencing DEFLATION in the price of homes, land, business, and paper assets, like stocks and bonds.  If such events occur it will truly be a perfect financial storm with especially devastating consequences for middle class Americans.

I maintain that deficits do matter Mr Vice President and President as you and unfortunately 303,000,000 Americans that you have placed at risk due to your reckless management of US fiscal and monetary policy are very likely about to find out.

It is already too late to reverse the down cycle in the Dollar. Events will have to run their uncertain course over the next several years. With trillions of Dollars now invested in exotic derivatives and packaged mortgage investments, many which have no ready market, the stage is set for a total disaster. The global financial linkage of many of these investments makes any forecast by anyone for what may happen highly uncertain.

However, one can forecast that it is a period of high risk for paper assets. Taking part in the bull market in commodities looks like a far better investment arena provided one doesn’t become too over leveraged.

Even at prices over $700 an oz. gold makes for a good insurance policy against an American Dollar collapse. To read more about currency trends go to Forex Trading Guru.

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