There are two short-term advantages to a weak US dollar.
The primary advantage of purposefully driving the value of the US Dollar down, as Bernanke and Geithner both know, is that it makes US exports more attractively priced for foreign buyers. This, of course, helps the US economy in theory (if more goods are purchased as a result, etc.).
A corollary advantage to cheaper US exports, if more of them are bought around the world, is that export sales will also help narrow the monstrously wide US trade deficit.
But as Larry Berman said earlier this week, and I agree – these will act as cushions on the US dollar in the short term only. Longer term, currencies can decline quite a bit. Short term there are limits to a currency’s decline, because countries will act to preserve their own exports economies by weakening their own currencies (eg., buy releasing their currency onto the market in exchange for more gold reserves – one theory behind Tuesday’s sharp $20 pop in gold).
Weekly Auction Amounts of US Treasuries Expected to Increase
Weak USD Advantage Won’t Last
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There are at least three reasons why the inherent advantages in a weak US dollar aren’t going to last long.
Competitive Debasement.
As mentioned above, the more the USD weakens, the faster other countries attempt to weaken their own currency against the USD in order to protect their own export trades. How long can this competitive debasement continue? No one knows. Countries like China and Canada are slowly working to diversify their export economies, however, so as to not need to play this card.
Lowest the USD Has Ever Been Against the Canadian Dollar
Oil Priced in Dollars.
A big problem not many people have been talking about recently is the fact that the weaker the USD gets (presumably tolerated in order to help US exports), the more expensive oil becomes for as long as it continues to be priced in greenbacks. Ironically, oil costs are a HUGE part of the export business as companies need to pay for global shipping of their goods. Rising oil prices thus cancel out a large part of any gains made by a weaker currency. In this sense, the US is shooting itself in the foot.
More Debt than the Trade Deficit.
Finally, even if the export trade is improved, and perhaps some of the US GDP numbers with it, the fact remains that the trade deficit is only one deficit (there is also a budget deficit), and there is still the national debt to contend with (current and future obligations!). Solving the trade deficit problem, as good as that would be, doesn’t even touch the other two gorillas in the room.
For all of these reasons, investors should still be wary about the direction of the US dollar. Average consumers may have less to worry about (except rising prices, of course) if they don’t travel outside the US and thus never need to buy other currencies, but they will not be immune from the side effects of a weak US dollar long-term.
Solution? Buy other currencies. Invest in non-US companies, especially foreign oil stocks or gold stocks. Invest in US companies that get much of their profits from abroad. Don’t keep all your money in US dollar bonds.
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