The Falling Dollar ... A Patriot's View

American’s wear the Dollar like a badge of honor. Since World War II, U.S. Dollar has been the standard bearer … the flagship … the beacon in the night. Our greenback embodies the hopes and dreams of every American. Thus, as the dollar has declined, so has the pride of an entire nation.

But should we really care? Is it unpatriotic to do nothing as the dollar shrinks to a mere shadow of its former self? Are mom, apple pie and the American Way really at risk?

In my view … no!

I believe that we ought to be rooting for the dollar to further weaken. It is true, that a weaker dollar decreases our buying power at the gas pump or the supermarket. But a weaker dollar also makes exports more attractive, which may in the long-run lead to a sustainable upturn in domestic manufacturing and job creation.

It’s wrong to read too much in to the rapid decline of the dollar. The dollar, like any other asset fluctuates substantially from year-to-year. But overall, the dollar’s real value has changed very little. During the past 20-years, when the dollar is compared with a broad basket of the world’s major currencies, the greenback only has declined about seven percent on an inflation-adjusted basis. This is less than 0.5 percent per year.

All of us are feeling the pinch. As the subprime markets continue to unwind, it appears as if the “wheels” have come off the economy. In our rush to find a root cause, many of us, politicians especially, point to the ever-weakening dollar. But in truth, the market conditions we are witnessing today are part of a natural process. Historically, strong markets always are followed by stronger sell-offs.

The shrinking dollar not only stimulates U.S. exports, but will help to narrow our current trade deficit of nearly $700 billion --- a figure which amounts to nearly 5.1 percent of our entire gross domestic product. This staggering imbalance can only be addressed by curbing our appetite for cheaper imports and through a resurgence of our export sector combined with a devalued dollar. The Asian “tigers,” and in particular China, have prospered because of the dollar’s relative strength to their currencies. Maybe it’s time to put the “shoe on the other foot.”

At the upcoming April meeting of the G-7, exchange rate intervention by the world’s central banks to stem the dollar’s slide, will top the agenda. I believe that such intervention, however, will be counterproductive, and only will prolong the current recession. If world's central banks do intervene, causing the dollar to artificially rise, then U.S. economic recovery will stall because the benefits of a more competitive currency will be undermined.

Intervention by individual central banks may slow the dollar’s decline, but I do not think their actions ultimately will halt the slide. At this point, the negative fundamentals and overall downward inertia propelling the dollar simply are too powerful to overcome.

As an individual investor, I consider it as my patriotic duty to sell or “short” the dollar. Shorting the dollar not only presents significant speculative opportunities, but, in the end, I believe that I will be promoting an economy that is more competitive and resilient.



To learn more about my market recommendations, visit my website at:www.globewestfinancial.com.