Other than sex, nothing holds our attention more than money. Dating back to Ben Franklin’s “A penny saved is a penny earned,” money has permeated every pore of our national psyche.
American humorists and folk philosophers have always chided us about our obsession with the almighty buck.
Will Rogers once quipped that “Money and women are the most sought after and the least understood of any two things in life.”
The always irascible comic Groucho Marx curiously counseled that “money will not make you happy, and happy will not make you money.”
Adding his two cents to the philosophical fray, billionaire realist J. Paul Getty lamented that “money isn’t everything. But it sure keeps you in touch with your children.”
Nothing reminds us more about the importance of money or value of the dollar than a sharp downturn in the economy.
While the economy appears to be on a rebound after the worst recession in a generation, the U.S. dollar still is getting hammered. The greenback looks as if it is going to continue slipping in value for the foreseeable future.
It’s Fall in More Ways Than One
JP Morgan Chase & Co., the nation’s second largest bank is advising its clients that the dollar will fall to a record low against the world’s major currencies next year amid signs the Federal Reserve will keep interest rates near zero until 2011. The bank also believes the value of the dollar will be undermined by the current trend of global investors seeking higher-yielding assets outside the United States.
Morgan’s foreign-exchange strategists, in a report published today, are projecting that the dollar will weaken to $1.62 against the euro, a potential record low. The bank previously predicted a trough of $1.50 vs. the euro through in the first quarter of 2010.
With U.S. interest rates effectively being held at zero, the dollar has continued to be attractive to sell in so-called carry trades, in which investors use the greenback to fund purchases of higher-yielding currencies such as the Australian dollar or Norwegian kroner. Throughout this past year, the dollar has been weakened by the growing number of central banks that have increased their percentage of foreign reserves held in euros.
According to recent reports, in the last quarter, central bankers converted more than $400 billion of their reserve holdings away from the dollar. Of those nations reporting their reserve currency breakdowns, statistics show that 63 percent of new cash holdings were converted into euros with an increasing percentage being directed to the Japanese yen.
Since rising to a three-month high in early March, the dollar has lost 17 percent of its value to the euro. In July 2008, the dollar dropped to $1.60, an all-time low against the European currency. Now it appears positioned to break through that previous bottom.
Interest Rate Is the Central Issue
To most analysts, the key driver in the dollar’s decline has been interest rate policies at the Fed. The growing preference of global investors for non-U.S. equities, combined with rising merger and acquisition outflows, are also compounding the dollar’s decay.
Although the dollar is headed for historic lows, the news is not all bad.
Revised government figures show that the U.S. economy grew at an annual rate of 2.8 percent last quarter, and 3.5 percent last month. This growth can in part be linked to the weakened dollar making U.S. exports more attractive.
Consumer spending, which accounts for about 70 percent of the economy, rose at a 2.9 percent pace, compared with the 3.2 percent rate that was the median forecast of economists.
Surprisingly, personal consumption has rebounded after declining 3.5 percent in the third quarter of 2008, the most in the U.S. since 1980. Despite the persistent rise in employment, with Christmas holidays just around the corner, consumers appear to be cracking their wallets open marginally wider.
Even with the sales and bargains seemingly on every retail corner, the consumer dollar still is shrinking in value, and likely will do so well into 2010.
Several forecasters are projecting the dollar to depreciate to 82 yen next year. Previous forecasts pegged the drop of the dollar-yen to no weaker than 91 in 2010. Analysts are also predicting that the British pound will climb to a peak of $1.74 during 2010. Currently, the pound sterling is trading at $1.66.
Gold and silver have been significant beneficiaries of the declining dollar. Gold hit a new high of $1,172 yesterday while silver is approaching the $19 per ounce threshold.
As the Fed begins to withdraw its extraordinary monetary measures in the latter half of 2010 and the slosh of dollars from the central government’s stimulus programs starts to wane, the dollar should likewise regain its footing.
Until then, however, U.S. consumers are going to continue being a day late and dollar short.
John Cohn is a senior partner in the Globe West Financial Group based in West Los Angeles. He may be contacted at www.globewestfinancial.com
