The Weakening Dollar – I

There’s been a lot of talk regardimg the weakening US dollar and its effect on your wealth. Many people believe it can’t last and the dollar will rebound. Others think that it still has more room to fall.

I personally think that it will continue to fall so long as the government does nothing to stop the reasons for the weakness. Here’s a good explanation by Mark Hutchinson.

The U.S. greenback will remain generally weak for two key reasons:

* First, the United States is still running a $700 billion balance-of-payments deficit with the rest of the world. Asian central banks have been financing this by buying U.S. Treasury bonds. As we now also know, German regional banks have also been financing it by buying subprime mortgage debt. [It’s particularly good for the balance-of-payments ledger when foreigners buy subprime mortgage debt, helium-filled dot-com stocks, or the Brooklyn Bridge, because the profit that domestic shysters make from selling worthless assets to foreigners counts as income.] Nevertheless, both these once-favorable trends are showing signs of ending. This means the United States has to export more, which means the dollar must drop still more against the euro, sterling, yen, renminbi and the currency of anyone else that might be persuaded to buy U.S. products if they’re cheap enough.

* Second, the dollar will remain weak and probably get weaker – at least in the short run – because U.S. Federal Reserve Chairman Ben S. Bernanke has twice recently cut short-term interest rates: a half-percentage point [from 5.25% to 4.75%] on Sept. 18, and a quarter point [from 4.75% to 4.50%] on Oct. 31. Since the Bank of England, the European Central Bank and the Bank of Japan are all closer to raising interest rates than reducing them, Fed rate cuts make the even less attractive by comparison. And many analysts see additional rate reductions to come.

So assuming you agree that this trend is likely to continue, how have you positioned yourself to either hedge against or profit from this?

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