Sinking dollar alters the game in 2008

Templewest

Almost every news network did a story in 2007 about foreigners coming to the states to shop and invest, even in real estate.  What compelled this behavior?

Among the many troubles confounding Fed Chairman Ben Bernanke during this credit crisis is the steady decline of the U.S. dollar.  He and the Fed have reduced the federal funds target rate, which now stands at 4.25, attempting to stimulate lending by the country’s major banks.  But as ”Helicopter Ben” tries to save the credit business, he has put more dollars on the street.  With more supply out there, the dollar has lost value, and investors see the possibility higher of inflation or even a currency crisis on the horizon.

Currency exchange works like a see-saw.  The U.S. dollar sits on one side and another currency, like the Euro, sits on the other.  In a perfectly equal world, the two players would be balanced: one dollar equals one Euro.  But this never happens as financial and political conditions tilt the board up and down.  So they see-saw.  But they never go beyond a certain point.  One player cannot shoot herself up into space or propel her friend through the ground.  They hit a point where going further would ruin the game.

Let’s say you make Gucci sunglasses in Italy.  You don’t want the exchange rate to get to a point where Americans will stop buying your sunglasses.  If the Euro gets too expensive, you lose business.  This effect creates the see-saw game. 

Economists say the U.S. dollar will approach that nadir in 2008.  Economist Adolfo Laurenti, of Mesirow Financial Holdings Inc., said the dollar should continue to decline in 2008, but will eventually level off.  The U.S. dollar closed at 0.6781 Thursday against the Euro and lost value to many other major currencies in ‘07.  Market conditions will tug the dollar back up in the New Year.  And there are 20 reasons why the falling dollar is good for Americans.

But, sorry Ben, you can’t sleep soundly yet.  The low dollar makes imports more expensive.  What’s the most notorious import?  Oil.  Light, sweet crude broke the $100 a barrel mark on Wednesday.  Even the Iowa Caucus could not drown this story.  To illustrate the problem, the U.S. imports more oil from Canada than any other country.  And in September, the Canadian loonie became more valuable than the U.S. dollar for the first time since 1976.

Why 1976?  Oh, right.  That oil stuff.

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