Currencies, US Economy

What Dollar Story?

By, 12/26/2007

Story Highlights:

  • The dollar's fall was one of the top financial headlines of 2007. But after a late year rally, the dollar's decline appears barely noteworthy today.
  • Ultimately, currencies are a store of value—and no currency has a more stable and strong economy, military, or range of political influence behind it than the dollar.

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Life wasn't easy for the dollar in 2007. Greenbacks decidedly lost their sex appeal. Was it the pounds packed on from too much mortgage debt, the thinning of financial assets up top, the stench of subprime problems, the cheap interest rates? Supermodel Gisele is no longer returning phone calls. Investors are shying away. Even the Taj Mahal is denying entrance:

Taj Mahal Won't Accept Bush Dollars as India Laments Lost Value
By James G. Neuger and Simon Kennedy. Bloomberg
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a4zLUifSh7pg

But now that the year's just about through, we're wondering what all the fuss was about. After months of hand-wringing over the dollar's demise, it turns out bucks didn't sink very much in the first place. Against a basket of major foreign currencies, the dollar's hovering around -5% for 2007. That's nothing to get excited about. Currencies bounce around all the time. What's weak today may be strong tomorrow for no other reason than normal market volatility.

Why the Dollar Has Rebounded a Bit
By Joanna Slater. The Wall Street Journal
http://online.wsj.com/article/SB119785257142732747.html?mod=sphere_ts

Dollar Gains on Strong GDP Numbers
By the Associated Press via, CNNMoney.com
http://money.cnn.com/2007/12/20/markets/dollar.ap/index.htm


Both these headlines are grappling for reasons to explain the dollar's recent strength. In truth, it's probably just normal fluctuation. Trying to pin currency movements on deficits, economic growth, or other miscellany is treacherous and usually outright wrong. At best, perhaps we can say currency movements are tied to relative interest rate expectations.

In any case, the fact remains that dollars are still the global currency standard. Dollars are by far the most liquid, and foreign banks and institutions continue to demonstrate willingness to hold them in vast amounts. Foreign investors now hold some $2.25 trillion, mostly in US public debt. The really big bucks come from big foreign central banks. Japan is the biggest dollar lover, with $582 billion, followed by China with $400 billion, and Britain at $266 billion.

Why do these major countries love dollars so much? When choosing a currency as a store of value, one of the most fundamental factors to consider is whether that currency will continue to be honored. It's all about stability. With its strong military force, status as largest global economy, and political leader of the free world, it's likely the US economy would fare relatively well in the case of global catastrophe.

Although there might be some money made from betting on currency moves, the underlying desire of a major central bank to hold a currency other than its own comes from belief in its stability. You can be sure China isn't pegging its own currency to dollars for the sake of winning a currency bet.

Also, talk in the news of the Euro overtaking the dollar is likely overwrought. The Euro hasn't been around long, and it is unclear how effective (or stable) monetary policy among a group of member states will prove to be anyway. If push really came to shove and a global crisis ensued, would the EU really stay together and support its communal currency? Who knows!

Either way, we call all of this much ado about nothing. The dollar is only down slightly for 2007, and stocks have fared just fine too.

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Sources:

Soaring US Debt Threatens Dollar
By David Stevenson, The Motley Fool

http://www.fool.co.uk/news/investing/2007/12/20/soaring-us-debt-threatens-dollar.aspx

Dog Days For The Super Dollar
Kenneth Rogoff, Project Syndicate
http://www.project-syndicate.org/commentary/rogoff37

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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