Archive for the ‘Dollar’ Category

The Big Disconnect

Monday, December 7th, 2015

Imagine being stuck in a blizzard.  You look out your window and can see the snow piling up outside, yet the meteorologist on your TV is forecasting continuing sunshine and near tropical weather.

That level of disconnect is similar to that shown by some members of the Federal Reserve Board, who are preparing for liftoff, even as the economy implodes like a SpaceX rocket. The difference, though, is that the SpaceX failure was an unmanned flight; when the Fed acts, we’re all on board, like it or not.Fed Meteorologist

We recently reported that a couple of members of the Federal Open Market Committee had spoken publicly in favor of a rate hike. But this past week, they were no longer the outliers, as even Fed Chair Janet Yellen joined in during a speech before the Economic Club of Washington.

USA Today reported, “Federal Reserve Chair Janet Yellen signaled Wednesday that the Fed is all but certain to raise interest rates this month for the first time in nearly a decade, saying that gains in the economy and labor market have met the central bank’s goals.”

If you read on, though, that’s not quite what she said.  Given that inflation is nowhere near the Fed’s 2% goal, she couldn’t say that the central bank’s goals have been met. (more…)

Why It’s Called “the Almighty Dollar”

Friday, November 14th, 2014

It may be a good time to plan that European vacation.  The long-weak dollar is gaining strength again, which means you may be able to afford good food, good wine and a quality hotel if you visit the Old World.

During the Fed Reign of the past five-plus years, the dollar was like that elderly lady in the commercials who says, “I’ve fallen and I can’t get up.”  Other countries tried to help by weakening their currencies, of course, but the resulting currency wars appear to have ended along with quantitative easing and now the dollar is strong and getting stronger.

Dollar Index
The good news is that the strengthening dollar will make foreign goods cheaper for American consumers (so much for boosting inflation).  American companies may also reduce prices or keep them from rising to remain competitive.

As a result, Americans will spend less on essentials like oil and will have more money left to spend on other things, which should boost the economy.  A strong dollar will also attract foreign investors to American assets, such as U.S. Treasury bonds.

The bad news is that consumer spending on imports will increase the trade deficit – in fact, it already has.  American companies that rely on exports or that have multi-national locations will be hurt.

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It’s Only Money

Friday, September 26th, 2014

“Money often costs too much.”                                                                               Ralph Waldo Emerson

It really does all come down to money.

Money decides the outcome of wars and elections.  It ensures that we are properly fed and clothed.  It buys us an education and pays for all of our material needs.  And it may not be able to buy happiness, but it does have a dramatic impact on that vague thing that’s often referred to as “quality of life.”

All of us, if we’re being honest, would rather have more of it than less of it.

But the value of money is variable.  The currency of one country continuously fluctuates in value relative to the currency of every other country – and those fluctuations can have a dramatic economic impact.

A Stronger Dollar

You’d think countries would be striving to make their currencies stronger, but in recent years, we’ve had “currency wars” as competing countries have tried to weaken their currencies to increase demand for their imported goods.

DollarThe United States has criticized China for its currency manipulation, but in the meantime, the Federal Reserve Board’s easy money policies have deliberately weakened the dollar.

Now, though, as other countries’ currencies have become weaker, the dollar has strengthened.  In fact, the dollar reached a four-year high this week against a basket of major currencies, as The Wall Street Journal reported, “amid mounting expectations the Federal Reserve will raise interest rates next year while its counterparts in Europe and Japan consider further measures to raise inflation and spur growth.”

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The Dollar Is In Danger

Thursday, July 17th, 2014

It’s a sign of America’s strength and its position as leader of the free world that the dollar is the world’s reserve currency.

Just as English is the closest we’ve come to an internationally accepted language, the dollar is a common denominator, held in reserve by governments and institutions around the world, and used in international transactions.

But that may be changing.  And if it does, we can blame ourselves – or, more specifically, the Federal Reserve Board.Reserve Currency Status

Why should we care?  With reserve currency status, the U.S. can:

  • Purchase imports and borrow internationally at a lower rate than other nations, because we don’t need to exchange our currency to do so.  The lower rate saves America about $100 billion a year.
  • Avoid a potential currency crisis.  When countries don’t have enough foreign exchange reserves to maintain the country’s fixed exchange rate, they face a currency crisis.  The result is typically attacks by speculators in the foreign exchange market and the devaluation of the currency.
  • Run higher trade deficits with less economic impact.
  • Print money to pay off its debts.
  • Preserve America’s status as a world leader.  The dollar’s reserve currency status is a symbol of American strength.  A loss of that role would be a sign of the country’s diminished status.

So if the dollar loses its reserve currency status, America is in trouble.  Government debt will rise, the cost of imports will be higher and the economy will suffer.

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