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The Almighty Dollar Losing Ground

Dec 16, 2008

On Dec. 11, I wrote a blog about the falling dollar. I mentioned that the previous day (Dec. 10) it took $1.30 to buy one euro, and the next day it took $1.33 to buy a euro. That was a pretty steep one-day decline in the value of the dollar.

Today the Fed lowered interest rates to zero. The stock market rejoiced; the dollar dropped to $1.415 before recovering slightly to close at $1.402 to the euro. So the dollar has essentially dropped by 10 cents in less than a week. By anyone's standards, this is huge.

Of course, the plunge in the dollar's value helps us to export our stuff more cheaply to other countries. That's the positive side to it. People will want to buy American, because their own money buys more American goods than it used to.

But if this goes down too fast, it is going to alarm those who hold U.S. dollars, particularly foreign governments and banks. Every drop in the dollar means that they lose that much money. China holds a trillion dollars in reserves. That means in this past week they have lost about $100 billion (10%). Or, to put it another way, the U.S. government has just imposed a $100 billion tax on China. Lesser amounts on other countries. That's one way to make money.

Problem is, if those countries think the dollar is ready to collapse much further, they are going to do what anyone else would do--exchange those dollars for something that will go UP in value. That might be other currencies, or perhaps commodities like gold and silver. Everyone is on edge, watching their world neighbors to see what they will do. If anyone sees their neighbor edging toward the door, it could spark a stampede out of the dollar, and then all heaven will break loose.

China stands to be the biggest loser in such a scenario. They have already indicated that they intend to buy quite a few tons of gold. This latest drop in the dollar might hasten their buying spree. With the dollar down, gold and silver are both up for the day, and this trend may continue, unless other nations' currencies drop along with ours.

It's quite a chess game.

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Category: Financial

Dr. Stephen Jones

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