Seeing how the U.S. dollar, along with most other world currencies for that matter, has fallen against the Euro, one would think that the Euro Zone (countries of the European Union which use the Euro) was in great financial shape, but that isn’t necessarily the case. Spain and Ireland in particular are suffering mightily as they were unable to control the booms (see One Interest Rate, 13 Economies article), and now busts of their economies. The two stalwarts of the Euro Zone, France and Germany, have been holding the Euro up thus far, but now even their economies are starting to feel the heat. Oh, and don’t forget about the U.K.--even though they are not part of the Euro Zone, they are one of the largest economies in Europe and their outlook looks especially grim.

The German ZEW economic sentiment indicator has plunged to a record low, French business confidence has dropped, retail sales are down sharply and European companies are starting to default on their debt at alarming levels, according to Money Morning, an e-mail newsletter from MoneyWeek magazine. These are all obviously negative signs that point to the fact that the Euro Zone is heading in the wrong direction economically.

The U.K. isn’t doing all that great either. The U.K. had the same sort of run up in housing prices experienced in the U.S., only their down cycle is just beginning. Furthermore, their economy is driven by two key industries, construction and finance, both which are doing extremely poorly right now.

Even with the troubles being experienced in the U.S. the dollar could regain some ground against the Euro and British pound. While this might please travelers who are looking to visit Europe in the near future, there is a big concern to keep in mind with all this. When we talk about struggles in the U.S. and Europe, we are talking about the largest importing countries in the world. You can bet that if all these countries struggle at the same time, it will be felt across the world. We very well could be headed for a serious global recession of sorts, and investors certainly should be keeping that in mind.

Labels: dollar, economy, European Union, international

In the first quarter this year, Canada’s economy shrank by 0.3 percent, according to Bloomberg. So while all the talk is about a U.S. recession, surprisingly, Canada may just beat us to the punch.

This news came as a shock to me because of how strong Canada’s economy has been, including their oil industry. The biggest problem area apparently was the auto industry. If the auto- and auto-related industries were removed from the, calculations then Canada’s economy would have actually still grown, according to Bloomberg. The biggest importer of Canadian automobiles, of course, is the U.S. and we just aren’t buying too many cars right now. Not only is Canada suffering from the drop in consumer confidence in the U.S., which is the number one importer of Canadian goods, but more importantly, Canada is suffering from their strong currency.

Ever since the Canadian dollar surged against the U.S. dollar, the trade balance between the countries has changed. Canadians are buying more U.S. goods and the U.S. is buying fewer Canadian goods because the U.S. goods are comparatively cheaper thanks to the weak U.S. dollar. Now the Bank of Canada is likely to cut interest rates in response. This should lead to the Canadian dollar dropping against the dollar, as it already has begun to do.

Labels: business, dollar, economy, international

Yesterday, the Fed did what everyone expected by cutting interest rates. The 0.75 point interest rate cut was lower than the full 1 point rate cut that futures traders were expecting, but within the range most people expected. It is doubtful that this interest rate cut will revive the economy for more than a brief showing on the stock market, and most people expect further interest rate cuts in the future. President Bush also mentioned yesterday that he is willing to take further measures to revive the economy, but first he wants to see how his economic stimulus package pans out.

Rather than discussing future cuts and policies, let’s talk about the present: The U.S. dollar is now the second lowest yielding major currency. The lowest yielding currency is the Japanese yen, which has pretty much maintained that title since Japan’s financial meltdown in the '90s (see previous post: Could The U.S. Be Headed For A Recession Similar To Japan's In The '90s?), which was eerily similar to the one the U.S. is experiencing. The U.S. dollar yields 2.25 percent, while Japanese yen yields 0.5 percent. The dollar still has some room to fall before it gets that low, but it is well on its way.

Why is the yield of a currency important?

Investors want to see return on their money, so if they aren’t getting the returns they seek at home, they will start to look elsewhere. For a good example of this, we can look to Japan. The Japanese don’t want to keep their savings in yen because they earn almost nothing on it, and with inflation is higher than interest rates, they are actually losing money. Because of this, people take their savings elsewhere. As more people sell off their yen, the currency goes lower.

There are also the carry traders who borrow money at low interest rates and invest that money in higher yielding currencies hoping to profit from the yield difference. Again, these traders are selling the low-yielding currency (lowering its value further) and buying higher yielding currencies (raising their value). Carry trading has become popular of late, and its power to move currencies should not be overlooked.

For the reasons mentioned above and others, as currencies decrease their yield their value goes down, and as the yields get raised the currency value goes up. The fact that the U.S. keeps lowering the dollar yield is further reason to believe that the dollar will continue its slide.

Labels: dollar, economy, Fed

I think that almost everyone is aware that the U.S. dollar is struggling, but many are not truly aware of the severity of the situation. The Associated Press released an article yesterday which talked about some of the issues. It mainly focuses on how many businesses in foreign countries no longer accepting the U.S. dollar, but it also talks about some of the underlying issues as well. Here are some excerpts:

“Experts say the bleak U.S. economic forecast means it will take years for the greenback to recover its value and prestige.”

“The dollar has steadily eroded in value against the euro and other currencies since 2002 as U.S. budget and trade deficits ballooned, but fears of an American recession and credit crisis have sent the dollar to stunning lows amid predictions the slump will continue for a long time.”

“The dollar fell to a 12-year low against the Japanese yen Thursday, dropping below 100 yen to the dollar for the first time since November 1995. The euro rose to all time high and is currently trading above $1.55. Meanwhile gold hit a new benchmark today at $1,000 an ounce. That's a jump of nearly 20 percent just since Jan. 1.”

“While dollar cycles have come and gone, experts caution that it's now much more difficult to predict when this one will end because the euro didn't exist as competition for the dollar before.”

“During previous U.S. economic downturns, big foreign funds typically snapped up U.S. Treasury securities, helping to shore up the dollar to a certain degree. But the euro and currencies from other nations are now seen as legitimate options, and interest rates are higher outside the United States — meaning the funds can get better returns on investments elsewhere.”

“Nations that were once seen as incredibly risky for investments — such as Brazil — are now seen as good long-term bets.”

I have long been warning that the U.S. dollar was on the way down, as many other financial experts have been, but many people still seem to be in denial of the situation. Those who are still in denial need to wake up...and fast. The problems in the U.S. are going to be around for a while, and, in the meantime, investors need to look at diversifying across currencies in order to maintain the integrity of their investments’ value. Stubborn investors who refuse to abandon (or at least strongly diversify) the dollar, are likely to be very unhappy and very poor.

Labels: dollar, economy, inflation