The Falling Dollar

We all hear in the news about the free -fall of the dollar in the world currency markets. So you may ask, how does this effect me? Personally, unless I am traveling to a country that does not have a favorable exhange rate, I really don't feel it. There are even claims that the terrorists are orchestrating the dollars free-fall. So let's take a hard look at what this all means to the investor both individual or corporate.

For example, let's see what happens as the dollar falls against the euro . As the cost of travelling to Europe becomes very expensive for the U.S. traveler, the number of American travelers to Europe decreases. Goods produced in Europe will become more expensive for export to the world markets. This will cause a slowdown in the countries where the exchange rate is higher than the U.S. dollar causing the balance of trade to turn favorably for the U.S..

For example, for those living in Europe, the cost of goods produced in the U.S. will amass a greater value. Consumers will have greater buying power if they choose American products. We are already seeing European travelers coming to the U.S. for vacations and shopping . This should increase our overall economy.

So let's go back to our original question. How does it affect the those investing in domestic investments, whether it be in the public or private markets? Many believe that the cost of money will go up and investors buying our dollars will demand a premium for purchase of treasury bonds which are financing our deficits and the war on terror around the world. By raising our cost of money in the treasury markets, the cost of money for businesses in the U.S. will rise commensurately. The demand for homes will fall, new construction and durable goods will stall, layoffs will increase, and domestic consumption will be reduced. The economy will spiral downwards. Secondly, since 60-70% of our oil consumption is imported, with the devaluation of the dollar the cost of fuel , a backbone of our economy will incease. This will further slow our economy.

The next question is what the terrorists gain by pushing down the value of the U.S. dollar? Their first interest is to discredit the dollar as the world medium for exchange. The second thought is to try to bankrupt the dollar by getting investors to fear the stability of the U.S. dollar thereby, demanding a higher and higher cost of money. The terrorists realize that if they don't try to destroy the U.S. economy while we are still reliant on Middle East oil, they will never have a chance to affect the dollar and the U.S. economy as militarily they are not succeeding.

The effects on the public markets can be expected to cause added pressure on the stock market forcing it downwards. The bond market will grow due to the higher yields that bonds will have to pay to attract funds. Real estate prices will probably tumble, since investors require a higher return to compete against alternative money instruments. Gold, silver and other precious metals will probably increase in price for fear of the U.S. dollar's stability. Additionally, the cost of carry will increase with higher interest rates for credit and mortgage rates.

The positive side is that we probably will see more funds invested into the U.S by foreigners. The euro, as in our example, will have a much greater buying power. Investors will flock to buy the cheap investments in the U.S. for the currency play alone. High oil prices will fuel growth in alternative fuels, as gasahol, solar, wind, coal gasification and hydrogen fuel cells etc. If anything, it should be an interesting time period for all of us to experience.

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