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6:03 PM
zimbio
“The data continues to come in, for the most part it's disappointing,” said Brian Dolan, chief strategist at FOREX.com. The dollar hit an eight month low versus the Yen recently, and has lost significant ground to the Euro as well. Home sales continue to fall, while the number of unemployed citizens rise. Vital sections of the American economy stand stagnant, and we import more while we manufacture less. “We’re still grappling with a slowdown in the US, a potential policy response from the Fed,” Dolan stated.
They tell us the economy is recovering, yet the dollar hasn't seen a gain since June 4th. Crude oil has gone from $17.45 a barrel (2001) to $75 a barrel, rising over 300%. Gold has gone from $255 an ounce (2001) to more than $1,200 oz. Again, a gain of over 300%. And, according to The Economist, the cost of a Big Mac has gone from $2.54 in 2001 to $3.57 now, a giant increase. In global terms, the purchasing power of U.S. consumers has declined dramatically.
But in order to fully understand where the dollar stands, we need to take look at it's history. In 1933, the average American citizen was taken off the gold standard. In an executive order, Franklin Roosevelt declared personal ownership of gold backed currency illegal. (it was made legal again during the Ford administration) In 1971, the gold standard ended for the rest of the world. President Richard Nixon canceled the ability of foreign governments and central banks to convert American dollars into gold. Nixon's action ended what was known as the Bretton Woods system, which pegged the dollar to gold at $35 an ounce and fixed major exchange rates to the dollar. Now, the world operates on fiat currency, which means money is worth something because a government says so, but it has no fixed value, and exchange rates can be manipulated by the market.
Because of America's dominance in trade and its possession of the world's largest percentage of gold, the U.S. dollar became the worlds reserve currency after world war II. As a reserve currency, the dollar was the main currency used when nations traded. This arrangement provided the United States with several benefits. (mainly the benefit of printing more money than available) This privilege made the US the recipient of the savings of nations that fix their currency to the dollar. Capital poured into the markets from overseas, keeping U.S. interest rates lower than they would have otherwise been.
Americans' abuse of this privilege explains what has happened to the dollar in the past decade. The United States consumes more than it produces, it's simple.
Since 2007, over 2 million manufacturing jobs have been lost.
Worst case scenario:
1. The dollar falls and looses its status as the world reserve currency. (which is already happening)
2. The government would have to cut spending to pay its debts.
3. Interest rates would rise.
4. The cost of oil would skyrocket.
5. It would make the current recession seem like a vacation.
On top of all this, Asian central banks holding almost 60 percent of the world’s foreign exchange reserves are turning away from the dollar. Concerned about weakening U.S. growth and the Treasury’s record borrowing, they are switching toward euro based assets to safeguard their reserves.
Most analysts will say there is no need for panic at the moment, and they're partially right, if you know what your doing. Now, everyone knows the dollar wont fall overnight, it's a slow process. But, everyone knows the dollar will inevitably fall. The question is when? Some predict as early as next year. The moral of the story? Always diversify your assets, and always prepare for the inevitable. (you aren't going to want American dollars if bread costs 20$ a loaf)
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