Why You Should Expect a Lower Dollar

October 12, 2009

Why You Should Expect a Lower Dollar

The big economic news has been the growing international outrage over the demise of the U.S. dollar, which hit a 14-month low against major currencies. The concerns regarding the decaying U.S. dollar escalated into a media frenzy, which helped to create panic buying in gold and in many stocks that benefit from a weaker dollar.

What sparked the attack on the dollar was the British paper, The Independent. The paper indicated that the Gulf Arab states, plus China, Russia, Japan and France, are planning to end the pricing of crude oil in dollars. I wouldn’t take this speculation to heart because much of this international outrage stems from the fact that—as the greenback continues to decay—the U.S. economy gets more competitive around the world. While such a move away from the dollar isn’t likely anytime soon, there’s no doubt the negativity weighed down the currency dramatically.

In fact, on Friday the Commerce Department announced that the U.S. trade deficit unexpectedly declined due to the weak dollar. The trade deficit fell 3.6% in August (the largest decline in 10 years) because of a surge in exports. Specifically, exports rose by 0.2% to $128.2 billion, the highest level this year, while imports declined by 0.6% to $158.9 billion. Exports of industrial supplies (i.e. steelmaking material and gold) increased by $931 million in August, vehicle exports surged $496 million, and sales of food, feed and beverages rose $96 million. Higher gold prices also helped to boost exports.

This improvement in the trade deficit is due in large part to the decaying dollar, not any industrial resurgence in America. You see, a weaker dollar makes U.S.-made goods cheaper abroad. As the dollar declines, we should see continued strong sales of American products in Europe, Asia and elsewhere. This is one of the ways that the U.S. economy has fixed itself after the worst of the recession—a resurgence of exports has helped drive a business recovery due to overseas sales even while the American consumer is still pretty stingy at home. In the short term, a weak dollar is actually good for the economy because it drives these foreign sales.

The dollar temporarily found firmer footing in the past few days after Fed Chairman Ben Bernanke said he would remain diligent in fighting inflation, and that the time would come when the central bank would have to tighten interest rates. My take is that this won’t happen anytime soon because it would undercut the economic recovery and cause more harm than good. I believe the dollar’s sell-off is unlikely to fade soon.

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