Two Bucks a Pound?

MANIFESTO

Growing budget and trade deficit numbers, combined with recent economic reports have the US Dollar setting new lows: a 14-year low against the British pound ($1.97), close to a 2-year low against the Euro ($1.33). The most comprehensive measure of greenback’s clout, the US Dollar Exchange Index (USDX), has been steadily declining, and quite severely for the past two weeks. The index of provides a general barometer of the dollars strength by comparing it to six major currencies, and has been setting new 52-week lows almost daily. While the mainstream media has been relatively quiet on this issue, there are a few people who have noticed.

Iran, an OPEC member, has indicated it will lobby for dramatically lower quotas to raise the price of oil, and it's easy to see why other OPEC members would be concerned, albeit more quietly. OPEC sells oil to the world exclusively for dollars, so when the dollar slides and they go shopping anywhere outside of the US, those same Dollars buy much less than they did just last summer. Like me on my last vacation they're getting killed on the exchange rate, but on a much grander scale, and what's a crowned-prince to do?

Likewise, China is now sitting on over $1 trillion in foreign reserves, with that number growing by an estimated $20 billion each month. An estimated 60 to 80 percent of that is held in Dollars. China has been threatening to reduce its exposure to a weakening dollar for months now. The decision to acquire fewer Dollars would soften the dollar even more, but active selling could be a disaster.

The American Congress and the American public have been on a 6-year spending spree, and it would seem the reality of that profligate spending is about to become evident. Trade and budget deficits are going to yield higher energy prices, and limit our ability to deal honestly with China (or their willingness to deal honestly with us). It also limits the Fed’s ability to set domestic monetary policy: one thing that does make the dollar an attractive investment is the relatively high interest rates when comparing the US to Europe and Japan, meaning as the economy slows lowering interest rates becomes more risky proposition. I wonder if John Q. Public would have paid more attention to W’s spending spree and the cost of the war if they knew it would drive their mortgage rate or credit card payments up?