Tuesday, November 09, 2004


THE DOLLARS PLUNGE (and why you should worry)

The dollar hit a record low against the Euro yesterday, and is about to hit a new low against the Canadian dollar. Worries over the burgeoning budget deficit are causing investors to dump dollars in favor of more stable currencies.

At first blush, this might seem like a positive thing. It makes US goods for export less expensive and more competitive. It makes European and Canadian goods more expensive, making it more likely that Americans will buy goods produced here. And since most consumer goods purchase here are produced in China, which ties it's currency to the value of the dollar, it seems like the best of both worlds. But here's the rub:

The falling value of the dollar is making it more expensive for China to do business with the rest of the world. So they are threatening to tie the value of their currency to an average of currencies (pound sterling, euro, yen etc.) If this happens the cost of almost everything you buy (clothes, small appliances, shoes, etc.) will rise. The farther the dollar falls, the more expensive imported goods become. One commentator referred to it as importing inflation.

Add to this the fact that some OPEC members are again making noises about taking payment in euros instead of dollars, and the falling value of the dollar suddenly becomes a real concern.

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