Prague Twin

Tuesday, November 13, 2007

Understanding the Falling Dollar

A lot of my readers don't really understand economics and specifically currency exchange issues. Well, it is all relative. Here is an article by someone who REALLY understands currencies, and I think it is quite approachable, even if you are not an expert in these things.

So if you want to know why the dollar is diving, check it out.

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posted by Praguetwin at 9:45 PM

8 Comments:

  • Interesting and informative article and it does a good job of explaining the downward cascade. I believe one big problem for the US is that we don't make anything here any more. We are too dependant on imports and we don't produce enough in return as a counterbalance. Sounds a lot like Ross Perot's "giant sucking sound."

    By Anonymous Anonymous, at 12:32 AM  

  • I know you are generalizing a trend, but there is still a decent chunk of manufacturing in the states.

    One of the things that a falling dollar benefits is manufacturing and specifically manufacturing for export.

    But you are right, by becoming a consumer society and importing more and more and exporting less, the currency becomes debased. However, the debasement of the currency will naturally start to correct that trend.

    By Blogger Praguetwin, at 1:53 AM  

  • thanks for that.

    did you see this?...

    http://tinyurl.com/2r26c8

    By Anonymous Anonymous, at 11:14 AM  

  • Interesting article. Correct me if I'm wrong, but did he basically say that China will continue to lend us money because they can't afford to let our valuation sink too far?

    By Blogger Kathy, at 10:40 PM  

  • PT,

    I have a question you may be able to answer which I am post on RBE in an effort to solicit one from no_slappz.

    By Anonymous Anonymous, at 1:18 AM  

  • Michael,

    I've heard this theory before. A good friend of mine was a currency trader long on Euros when Saddam made the announcement. That was a good day for him.

    A couple of things. Just because the Euro was at 80cents at the time, doesn't mean they lost any money. The price is still denominated in USD so if someone would pay in Euros, they would have to pay the equivalent dollar amount. So that part was really, really stupid.

    Second thing, if a country accepted dollars for their oil, and then immediately bought Euros, it would have the same effect.

    The 2001 move on the dollar had much more to do with market fundamentals, the U.S. recession, new G7 rules and corporate issuance than Saddam's decision to accept payment for oil in Euros.

    Having said that, the announcement was an effective tool for perception, and it also guaranteed the purchase of an additional, what, 50 million Euros per day. Still, 10 trillion dollars a day passes through the FX markets, so honestly, 50 million is a drop in the bucket.

    Finally, with Iran, they are accepting Euros only for officially less than a year, but defacto this has been going on for a long time due to the sanctions on Iran which makes it exceedingly difficult for them to deal in USD. So the announcement barely caused a ripple in the FX markets when it came.

    Corporate issuance is the big key. That and central bank reserves and Arab countries going off their USD peg (i.e. Qatar, an ally).

    I'm not saying Saddams move didn't have any effect, it did. But in the scheme of things, it was very small, and it may have been #10 on the list for reasons to invade.

    By Blogger Praguetwin, at 12:56 AM  

  • Kathy,

    Yes, that is what he was saying, and I agree with that assessment. However, there are a lot of individual Chinese players that may be looking more towards self-preservation than preservation of the Chinese state.

    The TICS data tomorrow should be interesting.

    Loop,

    I'll check it out.

    By Blogger Praguetwin, at 12:58 AM  

  • Hi Praguetwin...I just responded to you over at Watergate Summer, but I thought I would come back over and explain, over at Watergate the LINK is usually in the Title- whether it be a video or an important story- so to get the stats on the post you asked about- all you have to do is just click the title- and I have linked to the CBS story....and yes the stats are for real..sadly...

    thanks for blogging about the falling dollar- it is concerning...

    By Blogger enigma4ever, at 1:52 AM  

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