With the mid-year fast approaching, it’s time to update my economic predicts for 2007:
Interest Rates — As I’ve been writing, I don’t expect U.S. interest rates to fall much this year because higher domestic rates are needed to support our fragile dollar. Yes, a lower priced currency is what America needs, but our greenback cannot fall too quickly on the world market because we still need foreign money coming into the U.S. to finance our debt.
There is a camp of economic thought developing that believes U.S. interest rates might need to rise to deal with our inflation and dollar problems. Are they right? Let’s just say that camp’s theory is gaining more credence as time passes.
U.S. Dollar — One of the biggest gainers this year against the greenback has been the Canadian dollar. Only a few short years ago, it would take CDN$1.54 to buy one U.S. dollar. Today, it only takes $1.07. I made a prediction of few years ago that the Canadian dollar would eventually be on par with the U.S. dollar — a prediction I’m sticking with.
Yes, the strength of the Canadian economy is playing a role in the rise of the value of the Canadian dollar. But it is my belief that the U.S. dollar weakness is more to blame. Too much debt and an increasing trade imbalance will continue to place pressure on the U.S. dollar throughout 2007.
Stocks — You can’t argue or fight an investment trend, and the trend for stock prices continues to be upward. In absolute terms, the Dow Jones Industrial is at a new record high. If we value the Dow in euros, pounds, or gold, the Dow is still below the level it traded for in early 2000. It’s no secret I’m not a big fan of big-cap stocks. But the trend is your friend. For now, I continue to see equities with an upward momentum trend… but only in straight numbers. When measured in euros, pounds, or gold, it would take a huge rally for the Dow to break to real new highs and that’s something I simply cannot see happening with a weakening U.S. housing market and a cash strapped American consumer.