Talking Up the Dollar

First Treasury Secretary Henry Paulson started talking about a stronger U.S. dollar. Fed Chief Ben Bernanke was next, commenting on how risks to the economy are fading and controlling inflation (via a higher dollar) was the Fed’s next priority. Finally, President Bush got into the act, telling us how a stronger dollar is in the interest of the U.S. and the global economy.

All this “talk” of a stronger valued U.S. dollar has been working. The principal method to get the value of the U.S. dollar rising against other world currencies is to raise American interest rates. By yesterday, the futures contract on the Chicago Board of Trade showed that there is almost a 100% chance that the Federal Reserve will raise interest rates by this December.

The “talk” has pushed the dollar up to a three-month high against the yen. (Too bad oil is not sold in yen!)

While most consumers are under the assumption that the value of the U.S. dollar against other world currencies does not matter unless you are traveling outside the U.S., investors understand that the value of the dollar is of utmost importance to the financial markets. Case in point at this time: Oil prices.

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The U.S. dollar has fallen almost 10% against the euro and eight percent against the yen since September of last year when the Fed started decreasing interest rates aggressively. Reduced domestic interest rates mean a lower valued U.S. dollar. And oil producers in other countries do not like getting paid in a currency that is declining in value.

My message in PROFIT CONFIDENTIAL these past weeks has been consistent: I’m seeing higher interest rates in the near future. As I started writing in January, the U.S. economy is not in as bad shape as the majority of analysts and reporters have been claiming.

Bernanke’s fast interest-rate cuts saved the economy again. The Fed now sees the importance behind keeping oil prices (and inflation) in check. Therefore, it will soon start moving interest rates higher to bring oil prices lower. All that “talk” of a higher U.S. dollar is really “talk” of higher interest rates. And that means that the housing market will continue under pressure (or least will not get better) for some time to come.