The Doomed U.S. Dollar
Inflation in the European Economic Community (EEC) hit 2.6% in October, up sharply to the highest level in two years. The EEC is comprised of the 13 countries that share the euro as their common currency.
With the European Central Bank (ECB) having a stated goal of annual inflation below two percent, the sudden jump in inflation in Europe will likely keep interest rates in Europe unchanged to higher. A recent report pegging the ECC unemployment rate at 7.3% (the lowest rate in about two decades) diminishes the chances of interest rate cuts by the ECB.
Is it any wonder the euro is up 14% this year against the U.S. dollar? Expect the trend of a lower U.S. dollar and higher euro to continue. With interest rates staying pat in Europe and the property market bust in the U.S. forcing the Fed to lower rates in the U.S., the U.S. dollar is doomed for now.
If there ever was a trade American investors could make for profit…where the writing was clearly on the wall…this has been the trade for past three years: Make money by investing outside the U.S. in non-U.S. dollars. I’ve preached the benefits of this opportunity for years, and I continue to see it as a great opportunity.
The U.S. dollar is “doomed” for now, for better or for worse, and it might just be for better for the U.S. Huge deficits, a possible home-grown recession and a crashing real estate market places immense pressure on the Fed to lower interest rates in the U.S.
And when U.S. interest rates are going down while the majority of other world central banks have raised their interest rates and are keeping them high, a declining U.S. dollar is a natural outcome.
NEWSFLASH — The largest mortgage lender in the U.S., Countrywide Financial, reports a loss of $1.2 billion for its just-completed third quarter. Expect losses from American mortgage companies and new-home builders to continue well into 2008. By the time the bust is over, we will see a couple of major bankruptcies from companies related to home construction.