Dollar Trouble

In America, we are not feeling it yet. But the rest of the world is. What I’m talking about is the slowly devaluing U.S. dollar. Here, at home, if the U.S. dollar falls in value against other world currencies we don’t feel it unless we are traveling outside the U.S. (try going to Europe this summer… the greenback won’t get you much there).

Yes, as the U.S. dollar falls even further Americans will start to see the price of popular imports like electronics start to rise in price. Even low-priced items at stores like Wal-Mart will move higher in price as it will cost Wal-Mart more American dollars to buy Chinese imports.

It’s the foreigners who are feeling the pinch of a lower U.S. dollar. Imagine all those Europeans, Canadians, and South Americans who bought vacation condos in Florida and California. They can’t sell them because the currency hit would be too hard for them to handle. The same holds true for the foreigners who loaded up with U.S. stocks.

Today, the U.S. Fed will raise rates for the sixteenth time in a row. It’s unbelievable to me that after 16 interest rates hikes, the U.S. dollar is worth less against popular foreigner currencies today than it was worth before the rate hikes began! Is it any wonder the price of gold bullion just keeps rising?

Advertisement

In the short-term, a steady devaluation of the U.S. dollar is good for America. Foreigners will find travel and vacationing in the U.S. more than affordable this summer (boosting the U.S. travel industry), U.S. manufacturers might see new demand for their products as foreign-made products get too expensive and foreigners holding U.S. assets might find themselves hard-pressed to sell.

But the long-term costs of a weak U.S. dollar are many: U.S. interest rates won’t be able to fall because the dollar could collapse. Foreigners could become wary of further investments in the U.S. unless those investments provide high returns. Oil producers might start asking for something other than U.S. dollars for their oil. Gold may again become the official reserve currency of foreign central banks.

The new Fed chief has his work cut out for him. The U.S. dollar is in deep trouble. But interest rates can’t go too high because the U.S. economy will be choked: quite a balancing act going on.

The Canadian dollar hit a new 30-year high against the U.S. dollar this week. I can only hope my U.S. readers heeded my suggestion and bought their stocks on the main Canadian exchange, the TSX as most major U.S. stocks are listed on the NYSE and the TSX. If not, it’s not too late. I believe the Canadian dollar could easily rise another 20% against the U.S. Dollar.