The US dollar is collapsing. Every day it is hitting a new low against other major currencies, recently closing in on 1.38 against the Euro. Our government's policy is to crash our currency in order to boost our exports and reduce the real value of the US deficit and debt (it now seems clear that it was a policy of John Snow and is a policy of Henry Paulson). The policy of making US citizens purchasing power insignificant is arguably an unnecessary policy. The US economy is largely driven by intellectual property which doesn't need the boost of a worthless currency. The industries that do need the boost (auto manufacturing, etc.) will become that much less competitive when the boost is gone, and one day it will be gone. And then, of course, there is the impact that this has on all of us - forget buying that new Porsche or taking the family on summer vacation to London these days since these things are prohibitively expensive.
However, there is a benefit to the falling dollar. It is enabling US industry, from GM to Pfizer to Qualcomm, to report stability in their top line revenue where there is no stability and to report growth where there is no growth. It is easy to do. One Euro earned today is now a 15% increase over what one Euro was last year. Same is true for a British Pound. If your company holds its foreign earnings steady, that is a 15% increase in foreign earnings without doing anything. If half of a company's earnings come from abroad, there is your 7.5% growth, voila. CFOs have tremendous discretion in determining how and when to convert their revenue to US dollars for accounting purposes. Every US company is using this to its advantage today. It should be noted that the ability to actually repatriate currencies is often subject to less discretion and is often impacted by tax consequences and bilateral tax treaties.
On top of the earnings boost from a weaker dollar, we are seeing further appreciation by virtue of the fact that our equity markets are international. The weak dollar is making US assets attractive to foreign investors, with many companies suddenly becoming targets. Vodafone for example switched from being a potential seller of its 45% stake in Verizon Wireless last year to a potential purchaser of all of Verizon this year.
I am concerned that the US dollar strength cannot go on forever. A reversal would cause earnings to fall and our assets to be less attractive.
Meanwhile, I am also concerned by how the weakness in the dollar will affect the bottom lines of European companies that sell huge volumes in the US - the major European pharmaceuticals and the Nokias and Ericssons of this world. These companies will at some point need to convert (if even only for accounting purposes) their weak dollars back into their own currencies.
Comments
Anonymous
July 19, 2007
Good analysis that touches on a clear reality of the US economy.
Is this review helpful? Yes:0 / No: 0
Anonymous
July 19, 2007
Good analysis. I mostly agree. I travel to Canada frequently and it is amazing over the last five years how my purchasing power has declined.
A low dollar has many negatives but it does have benefits. It will help exports and it will help American workers compete more effecively. All of the offshoring has gotten much more expensive. The dollar is probably lower than its trading range and will rise at some point, probably when Bush is gone.
Is this review helpful? Yes:0 / No: 0
Anonymous
July 19, 2007
What about the yen? It has actually lost value against the dollar over the last five years.
Is this review helpful? Yes:0 / No: 0
Anonymous
July 21, 2007
I think it's even worse then your article suggests. With our third Secretary of the Treasury, arguably the most corrupt and incompetent President and Congress in the country's history, a minus 2% savings rate and a national debt of how much now....$10 trillion? I'm wating for Laura Bush to appear on a Whitehouse balcony singing Don't Cry For Me Argentina.
I believe whatever the short term corporate benefits a catastrophe is in the works....and I don't think there will be anyplace to hide when happens.
Is this review helpful? Yes:0 / No: 0
Anonymous
July 23, 2007
I am quite surprised that there haven't been more European and Uk acquisitions of US companies. The Daimler disposition of Chrysler also goes against the grain, but shows that private equity impact is outweighing currencies as well (or they expect a further US dollar fall).
Is this review helpful? Yes:0 / No: 0
Anonymous
July 23, 2007
With so much of accumulated dollar debt from our house buying spree of the past 5 years, we needed dollar inflow into the US to sustain our mortgage debts. And one way to do that is to make dollar cheaper and get additional influx of dollar into the US.
On the other hand, cheaper dollar has enabled even companies from India (rupee trades at 40:1 ratio) to buy US companies. This was not a feasibility few years back.
Is this review helpful? Yes:0 / No: 0
Dave Lloyd
August 07, 2007
I think that a big factor in all of this is the emergence of hedge funds that look to trade everything and therefore create sharper highs and lows in everything. Treasury just sits by and let's this happen because a weak dollar is a convenient way to finance our debt, but I don't believe that this is sustainable long term. Warren Buffett is right on most things, but he is dead wrong when he says that the dollar will continue to decline.
Is this review helpful? Yes:0 / No: 0
dc278
August 09, 2007
USD is undervalued long term but continues to face real short term problems, including the credit problem. However, the Fed's inability to respond quickly by lowering rates bodes well for a dollar bounce later this year if the 10-year bond remains around 5%. Against this backdrop, a decline in the Euro/dollar rate is also possible as Sarkozy is likely to push the EU towards tightening to be more competitive.
Is this review helpful? Yes:0 / No: 0
TJT1191
August 16, 2007
I agree. This is all going to reverse very quickly now that the dollar is strengthening against the Euro and pound. To make matters worse, at the same time, it is weakening against the Yen, which will cause an unwinding of the carry trade. A perfect storm coming.
Is this review helpful? Yes:0 / No: 0
Jerry Green
September 26, 2007
It seems to be continuing since you wrote this article. I think that it means that earnings will continue to show growth this quarter.
Is this review helpful? Yes:0 / No: 0
Add your Comment
or use your BestCashCow account