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When the Loon Soars Higher than the Eagle
by
findingDulcinea Staff
The U.S. dollar has been trading at all-time lows, dipping to $1.44 against the euro and below parity with the Canadian dollar, colloquially known as the “loonie,” for the first time in history.
30-Second Summary
The dollar dipped to an all-time low against other hard currencies such as the euro, the Canadian dollar and the Japanese yen on Monday, Oct. 22.
On Sept. 29, for the first time in the history of the two countries, the Canadian dollar eclipsed the U.S. dollar in value. The U.S. dollar has been slowly closing back in on the loonie; however, as of Oct. 23, the Canadian currency is still trading higher.
The value of the dollar against foreign currencies has been falling for several years. Part of the pressure comes from the “current account deficit” (the dollar value of U.S. imports in excess of the value of U.S. exports) of $800 billion per year.
The more recent drop may be attributable to the sub-prime mortgage crisis, which was spurred on by homeowners being unable to make mortgage payments, due to rising adjustable interest rates and falling housing prices. The consequent fear of a recession has already led to lower interest rates, which lessen demand for dollars by foreign investors.
A weaker dollar could translate into higher prices for internationally traded goods such as oil and gold, because investors see these commodities as safe investments in a time of instability. Also, foreign producers are dismayed because Americans will tend towards buying cheaper U.S.-made items.
Moreover, given the lower spending power of the dollar, Americans will be less likely to travel abroad.
Higher gas prices may also keep Americans closer to home, as well as increase shipping costs, which would significantly push up the costs of imported goods.
On Sept. 29, for the first time in the history of the two countries, the Canadian dollar eclipsed the U.S. dollar in value. The U.S. dollar has been slowly closing back in on the loonie; however, as of Oct. 23, the Canadian currency is still trading higher.
The value of the dollar against foreign currencies has been falling for several years. Part of the pressure comes from the “current account deficit” (the dollar value of U.S. imports in excess of the value of U.S. exports) of $800 billion per year.
The more recent drop may be attributable to the sub-prime mortgage crisis, which was spurred on by homeowners being unable to make mortgage payments, due to rising adjustable interest rates and falling housing prices. The consequent fear of a recession has already led to lower interest rates, which lessen demand for dollars by foreign investors.
A weaker dollar could translate into higher prices for internationally traded goods such as oil and gold, because investors see these commodities as safe investments in a time of instability. Also, foreign producers are dismayed because Americans will tend towards buying cheaper U.S.-made items.
Moreover, given the lower spending power of the dollar, Americans will be less likely to travel abroad.
Higher gas prices may also keep Americans closer to home, as well as increase shipping costs, which would significantly push up the costs of imported goods.
Headline Links: Steady decline
The euro jumped to new highs against the dollar on Oct. 22, with the currency of 13 European countries trading at $1.4319 following downbeat unemployment figures from the U.S. Department of Labor. Economists point to the implosion of the housing market following the bust of the sub-prime mortgage market as a reason for the lag in job creation. If adverse market conditions persist, the Federal Reserve will reduce interest rates again, following a cut in September. While the looser monetary policy will ease cash flows in the U.S. domestic market, it may further weaken the dollar. Such a move could prompt foreign exchange (“forex”) traders to shift their fixed-income investments into accounts whose currency bears higher interest, thus garnering better returns. Forex trading is the purchase and sale of two different currencies to take advantage of market fluctuations and make a profit.
Source: International Herald Tribune
Opinion & Analysis: Reasons for the fall
Grace Cheng, a well-regarded blogger who writes about Forex trading, writes about the Bank of America’s third-quarter financial report, which stated that the company’s losses totaled some $4 billion from the beginning of July to the end of September. She said this, in addition to the mortgage crisis affecting the U.S. credit markets, will likely keep the dollar’s value down compared to other hard currencies. Cheng says, “There is really very little reason to go long on the U.S. dollar for the short-to-medium term, as it could still fall further. Forex traders are again cutting down on the carry trade by buying back the [Japanese] yen and the Swiss franc.”
Source: Grace Cheng
Background: How does this affect daily life for Americans?
In a column published on Oct. 15, Martin Feldstein, a professor of economics at Harvard University and chair of the Council of Economic Advisers during the Reagan administration, argues that the dollar was overvalued. He says that a falling dollar would help to alleviate a trade deficit. There is a direct correlation between American purchasing power and imports. For example, when Americans have more disposable income, they are more likely to buy a French cheese rather than a locally produced brand. A cheaper dollar also raises the rate of American exports. This helps stabilize inflation, as there is less upwards pressure on prices for goods and services. Similarly, foreign markets have to employ fiscal measures such as raising or lowering interest rates in the face of a weaker dollar, as American goods seem more attractive in terms of price when the dollar is low.
Source: Financial Times
Carl Delfeld, head of the global advisory firm Chartwell Partners and columnist for Forbes, disagrees with Martin Feldstein’s theory that a weak dollar is good for the U.S. economy. His view is that a cheaper dollar weakens Americans' real spending power, especially for imported goods such as French wines or Japanese cars. A lower-priced dollar on international trading markets, he argues, could also translate into further pressure on the currency, as foreign treasuries move their reserves out of dollars and into other hard currencies such as the euro or Special Drawing Rights, a basket of currencies developed by the International Monetary Fund (IMF) with which emerging markets can hedge their national monetary units. “According to EPFR Global, investors are pouring money into global funds--with net inflows of $96.94 billion into world equity funds so far in 2007, while taking out $9.6 billion out of U.S. equity funds. Brazil's local stock exchange, the Bovespa, reported that investors have injected $1.2 billion into the market in September alone,” Delfeld writes.
Source: Forbes
The weaker dollar is one of the factors driving up oil prices, says The Economist. When currencies and capital markets are weak, investors find commodities trading more secure. “The recent credit crunch may have given commodities a further lift. Speculative money that had been flowing into high-yield bonds and structured credit is now looking for a new home. Some commodities, particularly gold, are also seen as a hedge against a declining dollar,” writes The Economist.
Source: The Economist
Reference Material: Forex at your fingertips
Potential Forex traders, those getting ready to travel abroad, or anyone interested in international finance can head to OANDA.com, which offers data on daily exchange rates for hundreds of currencies, data tables, and historical exchange rates, which are used by economists and financial analysts to track long-term trends. OANDA also offers Forex trading services, including training and practice accounts.
Source: OANDA
Related Topics: The sub-prime mortgage crisis
For more information on the sub-prime mortgage credit crisis and the subsequent pressure on the U.S. economy, please see our Beyond the Headlines story titled "Lenders and Home Buyers Long Deaf to Mortgage Warnings."
Source: findingDulcinea
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