How Low Can It Go?
The dollar hasn't seen weaker days in quite some time. This year has been tough on the American currency and it doesn't look like there is an end to the current bloodletting in sight. A result of the weak dollar has created a huge trade deficit with the rest of the world. The trade deficit is flying high and the once powerful dollar has sunk low against Europe's currency. The Bush administration has reacted with amazing calm to the developments that raise concerns about a possible dollar crisis.
Exports of goods and services grew to a record $97.5 billion in September. Exports were helped by the weaker dollar, which makes U.S. goods cheaper to foreign buyers and improved foreign demand. The recent October trade numbers looked a little better, but it wasn't nearly enough to give the dollar a leg up against other major currencies. America's politically sensitive trade deficit with China hit a record $15.5 billion as imports from the country also reached a high. U.S. manufacturers claim China's currency policies give Chinese companies a big competitive advantage. The U.S. is pressing Beijing to let the value of its currency, the Yuan, be set in open markets.
So who wins and who loses from the weak dollar?
The winners are the global community and U.S. companies that sell American goods overseas. Any American company that produces and exports goods overseas is no doubt doing well since a weak dollar makes their product(s) more affordable for populations abroad.
The loser is the American consumer. Our dollar buys fewer goods and services from foreign countries and makes them more expensive. Plus, if we are planning a trip abroad, the trip also costs more. This is a double whammy because since we're not traveling as much, the economy in foreign nations is also losing valuable tourist dollars.
So, if the dollar continues to show weakness, 2005 could experience a major monetary challenge. The continued decline of the dollar could force some foreign nations that we rely on to finance the U.S. budget deficit to be less likely to buy U.S. Treasury securities. There is also a worry in some sectors that more expensive exports from Euro-zone countries may hurt foreign businesses that export products to the U.S., thus threatening the economic growth potential in various European countries, China and Japan. Eventually, stronger European and Asian economies help the U.S. because many American companies depend on those nations to buy their products and services. And if our currency's value falls too far below some basic measure of its worth, U.S. products will become more attractive, which will likely increase demand for those products, which will increase demand for that country's currency, which will increase its value. Recently, Treasury Secretary John Snow said the U.S. would like the dollar to strengthen, but believes international currency markets should be left to set its value.
If you are looking for ways to make the most of the current weakness of the dollar to gain financially by investing in the FOREX, be sure to educate yourself about the risks and rewards of currency trading. There are a number of quality reference sources available, but I invite you to check out my book "FOREX Made Easy….6 Ways to Trade the Dollar." It's available through major bookstores and online at HYPERLINK "http://www.sixwaystotradethedollar.com" www.sixwaystotradethedollar.com. Once you understand the movement of the international currency markets, you can decide whether it's a financial play you would feel comfortable joining.
Originally published in the Outspoken e-newsletter.