Last January on a flight to Los Angeles I sat next to a young man from Australia. He and his fellow basketball team members were in the United States for some exhibition games. I believe he was returning home to college, but at the time he was enjoying his visit to the United States and the best thing about the country, he said, was the shopping. ‘The shopping?’ I thought. I never realized that age group of men were such consumers, but then I realized it may be more exaggerated with those from overseas because the exchange rate is, as he said, “just awesome.” At one point, he pulled out a U.S. dollar bill and said “they should just burn these.” A bit defensive, I replied, “The dollar hasn’t sunk that low.” But he explained that the bill itself was cumbersome and our U.S. Treasury should come up with a better idea (I didn’t have the heart to tell him about the failed Susan B. Anthony $1 coin or scarce $2 bill).
It seems that as our own consumer frenzy has cooled with the reality of $4 per gallon gasoline and higher food prices, our overseas friends have come to the rescue. Literally. A friend of mine, an American who lives in Paris, was visiting recently and said she hoped the dollar remained weak because she loved the exchange rate to the euro. Her sister said it was obvious, because she compared my friend to a “bulldozer through a store.”
Whether or not my friend or an Australian basketball team can help the United States out of its economic morass is unclear. What seems more apparent though is the U.S. dollar could be turning around and headed up, but due more to lack of competition. Unfortunately it isn’t because U.S. economic fundamentals have suddenly gotten shiny, but rather the global economy is joining our slowdown, and thus the dollar, which had been somewhat lonely, is finally finding friends.
In U.S. Dollar: Misery finds company, Senior Associate Editor Chris McMahon speaks to analysts and traders to find what seems to be helping the dollar. Not all is rosy. For example, net foreign purchases of long-term U.S. securities were down almost 40% between April and May. A further sign of the world’s waning fascination of the U.S. dollar: it used to make up about three-fourths of the world’s total reserves; now it’s down to two-thirds. Meantime, the euro has grown from a quarter to about one-third.
But again, despite the dollar still losing some ground, it has been joined by other currencies. One example, the euro has had five years of growth and now Europe is headed for a major slowdown. And though U.S. factors such as the troubled housing market, growing unemployment, inflation and the fear of a financial meltdown promise to keep the dollar in check, everyone else is in the same boat. But the U.S. dollar has the largest economy in the world. Although the threat of depression has been mumbled, and the financial system has been stressed, somehow the U.S. economy is still a beacon. Could the dollar lose its reserve currency status? Sure, but it’s unlikely. National pride says it’s because it is the dollar. But the reality is there is no better alternative.
With an election around the corner and a possible sea change in policies that have guided this dollar plunge, this could be good news for those dollar bulls. Perhaps they don’t see the dollar taking on its old glory days, but they don’t see it dropping much lower, or falling out of the ranges it now holds against other currencies.
The next six months promise to be rocky in all markets, but the dollar will have its own drama. Choppy markets usually signal a change in direction. Don’t expect a U-turn for the battered greenback, but it certainly could be looking up. For the global shoppers who love our bargains, this could break their stride, but lucky for us, not by much.
