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Mr. Dollar, The Good Old Days Are Gone – Perhaps Forever
On a recent business trip to Asia and the Middle East where I met with investment bankers, Private Equity players and Real Estate developers, the conversation almost always turned to the weakening dollar and its impact on the markets. Asian and Gulf. I’m certainly not surprised to learn that these people and companies are interested in the return of the US greenback especially when the US dollar is at an all-time low against the Euro and the Japanese Yen, but still, the volume and eloquence of the conversation surprised me.
As US trading partners, these countries can easily understand the consequences of the dollar’s decline, but it has become more than just a matter of trade. Historically the US dollar has held its own against major currencies; and as a result, many countries, our allies or our enemies, have considered it a safe and secure investment. What many Americans don’t realize is that because of this historic power, many of the US’s allies around the world have pegged their currencies to the US dollar and have felt squeezed in recent years. due to the depreciation of the dollar.
Recently, some of these countries have begun to re-evaluate their decision to continue this practice. The Kuwaiti government, one of America’s strongest trading partners, has decided after years of trusting the dollar to place the Dinar in a basket of currencies; The US dollar will no longer have the unique distinction. The idea is to give an average weight to the different currencies in the basket, based on their importance in the country’s international trade. For some of these countries, the United States is no longer their only trading partner.
In the case of Kuwait; as trade with China and India increases, its currency will hold more weight in the so-called basket. On the surface this doesn’t seem like much; but that’s what it is. The Kuwaitis may be the first sign of things to come; the importance of the US dollar is declining in the face of historically low prices and the decline of US power around the world. The young Euro, which has weakened once against the dollar recently, has become the 800lb gorilla as the dollar continues. In the coming year, the Chinese Yuan, the Indian Rupee and the proposed single Gulf currency will certainly pose more challenges to the strong dollar.
According to a recent report from the IMF, the decision of the Kuwaitis to switch cars is completely justified, the report says that they lost more than 12 percent of their value during the period. period of 2003-2006 the currency of the six countries under the auspices of the GCC. The IMF attributed this decline in the dollar to other major currencies. In fact, the recent Kuwaiti decision is not the first of its kind and the Kuwaiti government had to adjust its currency from the Dinar to the dollar by 1% in 2006.
This is not good for Mr. Dollar again because the possibility of interest rate arbitrage is huge in these conditions and to avoid such occurrences it is necessary to follow the lead of the United States in movement of the interest rate of the selected currency in dollars. For those who don’t understand arbitrage, it’s a very simple concept; It’s as simple as buying low and selling high. Sometimes the market creates opportunities through imbalances, for example, if you can buy a dollar for 3.50 dinars in Kuwait and then sell those dollars for 3.6 dinars in the international market -nationals have just done arbitration.
There are other concerns about the US economy that seem to be reverberating throughout the Middle East and perhaps the world; These include global inflation, lack of sales and, most recently, a downturn in the housing market.
One of the views that struck me was the perception and belief that the US government’s inflation numbers are not a true reflection of the inflation picture. On the surface, this seems like a completely absurd idea, but in fact it is not. Since the 1970s, the US government has been calculating core inflation excluding energy and food costs, which makes no sense because American consumers use gobs of energy and don’t like to fast. earlier; so he eats.
In fact, American households have the highest per capita energy consumption of any other country in the world, combine this with high oil prices and the real picture begins to emerge clearly. Government numbers show an inflation rate of between 2-3% but according to “The Economist” magazine and others who have monitored inflation, including the cost of energy and food, the actual number is between 3-5% (Varies due to changes in energy. costs). To put it into perspective, if you got a 4% raise from your boss last year, that would be a 1% reduction in your pocketbook because everything costs 5% more than the raise. cost of living.
One upside to the decline in the dollar would be an increase in exports to the United States; a weaker dollar makes American goods and services cheaper in international markets and may help reduce the trade deficit. The trade deficit with China alone was $232B in 2006.
The real impact of the world market that fluctuates with the dollar, inflation and the growing trade deficit may not be seen for years or even decades, but the outlook is not as good for the US economy and the US dollar as it used to be. The strength of the US dollar may decline as other countries and currencies take on a greater role in the global economy. One thing is for sure, for the US Dollar the good old days may be gone forever.
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