Have you ever noticed that people writing about economics use phrases such as “tends to,” “generally,” and “at this point?” As my old professor used to say, “If you laid all the economists end to end, they still wouldn’t reach a conclusion.”
The New York Times (January 3, 2007) reports that…
- The euro rose 11 percent relative to the U.S. dollar last year.
- Many countries, including the United Arab Emirates, Russia, Switzerland, and Venezuela, have added to their holdings of euros relative to dollars.
- Iran has announced that it prefers to be paid for its oil in euros, rather than dollars. (Of course, who understands why Iran does anything?)
Is this cause for alarm? As one pundit said, “I can give you 20 reasons why a declining dollar is good, and 20 reasons why it is bad.”
For example, a declining dollar tends to help our exports. Aviation exports are not only important to the aviation industry, they are also a shining light in the dark for our trade balances.
On the other hand, supply and demand work everywhere and on everything that is allowed to operate under the free market. An increase in our exports could influence the relative value of the dollar as people seek more dollars to pay for more exports. The world market is like a giant waterbed — poke it here, and it jiggles over there. Eventually it settles down, but not necessarily where particular people/countries want it to settle down.
The Times reports that many countries are buying euros simply to diversify their holdings, as should all investors. The changes are a very small part of the world market, and usually such movements have but a fleeting influence. For one thing, all of these countries are heavily invested in the dollar — they have a bunch of dollars. They can’t afford to drive the dollar too far down without impacting their own holdings.
Another cited reason for the changes is past and anticipated future cuts in our interest rates by our Federal Reserve. Because returns typically rise with real or anticipated interest rates, interest cuts cause investment money to move, just as investments move between stocks and bonds.
Kinda seems that the biggest danger will be the temptation of Congress to demand that “Something’s gotta be done.” Lord knows they will be urged to do so by many of their constituents. As is now well known, our great depression was made worse and lasted longer because nations of the world tried to manipulate the world markets.
According to Niger Gault, chief U.S. economist for Global Insight (whatever that is), “The dollar is still the world’s most important currency, and it’s going to stay that way.” He further states that the euro is going to become more important, but he didn’t see it “becoming more important than the dollar.”
Well, enough about economists.
