Below you will find the final guest article for this month from reader Vincenzo Desroches who works with forexcharts.net. I was personally curious how the strength or weakness of the dollar related to me in the real world and he kindly obliged to write an article. (emphasis in bold is mine)
Recent national headlines have been consumed by the economic crisis in Greece and whatever impacts these events may portend for the value of the Dollar. While a recent decline of the Euro versus the Dollar of 10% is news, it may only be a short-lived phenomenon if you believe industry pundits that have opined on the issue. However, these same experts note that Spain and Portugal are close behind with their own versions of this Greek Tragedy. With this continuous debate dominating the airways, what is the Average Joe supposed to think? Harsh economic times and a weak Dollar have demanded frugal budgets for the past eight years. Will a stronger Dollar make things better?
Our formidable Federal deficit has kept the Dollar weak for a number of years. The strength of the Dollar versus a basket of foreign currencies reached its peak in 2002, but it has been on a general decline of 20% thereafter to its present day value. The recent up-tick in strength noted in Euro/USD live charts may be signaling that a bottom has been reached. Americans have adapted to life under a weak international Dollar, but the possibility that this trend could be reversing is good news for all consumers, even the Average Joe on Main Street.
If Joe shops at Walmart and Target, then he won’t see a benefit for a while. Most Asian countries have pegged their currencies to the Dollar, and the retailers that buy from them have contracts denominated in Dollars, thus insulating themselves from the risk of modest currency movements. However, if long-term trends develop, U.S. retailers will modify their contracts accordingly and buy more products for less cost. Eventually, they may pass along a portion of these cost reductions to consumers, and Joe will ultimately see a benefit.
Oil prices are particularly sensitive to movements in the Dollar. Over the same eight-year period as the Dollar declined, we all witnessed the opposite effect on prices at the pump. Gasoline prices are at the $3 level today. Will a strengthening Dollar cause gas prices to fall? Yes, over time they will, but history tells us that the oil industry is much slower at reducing prices than the other way around. The same can be said about utility and power companies, but favorable changes will come.
And what about our grocers? The Average Joe has been hit hardest by price increases for food and staples, the necessities of life. These increases have been blamed on higher delivery costs brought to us by higher fuel prices. The transportation industry has been severely impacted by rising costs, and the flexibility of pricing models in reverse has yet to be demonstrated. Retail price reductions may take more time to reflect energy related cost reductions. Conversely, cheaper imports will provide the downward pressure necessary to encourage lower domestic prices for commodities and manufactured goods as well. Joe should see these impacts more quickly.
Long-term Dollar forecasts prepared at the beginning of the year presumed a gradual world economic recovery, coupled with a continuing weak Dollar. Economic recoveries take time, but the basic assumption was that the rest of the world would recover ahead of the United States, thereby keeping the Dollar behind or weak as interest rates rise abroad. If this scenario has fundamentally changed, then a stronger Dollar would move us to the forefront of the recovery. The Federal Reserve would then be inclined to increase interest rates to curb anticipated inflation. The Dollar would remain strong, but Joe might have to worry about the interest rate on his mortgage, if he has one. Perhaps now is the time to start saving for that dream home.
Typically the value of the Dollar is a good barometer as to the health of the underlying economy. Over the past several years, the Dollar has fallen, accurately indicating the overall deterioration in U.S. economic health. Basic fundamentals still suggest a gradual weakening is in order. However, exchange rate swings could represent relative value differences that may turn into longer-term trends. The Average Joe should benefit from such a trend in the form of lower prices, at least as long as inflation and higher interest rates remain at historically low levels.
photo courtesy flickr cc/ Marco Arment
photo courtesy flickr cc/ cometstarmoon