The U.S. Dollar continues to sag vs. foreign currencies and many experts are beginning to feel some concern. The Euro has reached record highs against the Dollar and there don’t seem to be any signs of slow down in the near future. This week, 1 Euro bought $1.48 in U.S. currency. Six months ago 1 Euro bought only $1.29. To gain a full understanding of that $.20 difference, one needs to realize that this is a 15% increase. Imagine how you might react to 15% inflation over 6 months? That would mean a $30, 000 car would be marked up another $4,500. Car dealers from Miami to LA would rejoice. Similarly, the value of the Dollar has dropped 8.4% against the already struggling Japanese Yen, and 6.7% against the British Pound.
Why is this important?
Here in America, this increase in the value of the Euro and decrease in value of the U.S. Dollar has no direct effect on our everyday purchases (there are, however, indirect effects). Nevertheless, when U.S. citizens go overseas to Europe or Japan, this is the type of sticker shock they experience. More importantly, when U.S. businesses purchase from these countries, a practice quite common in our import-heavy economy, they also experience this sharp difference in prices. It’s comparable to severe inflation, and increases the cost to produce goods; inevitably leading to some of that cost being passed down to consumers.
Even more importantly, and on a wider scale, sharp devaluations in the Dollar make the U.S. currency unattractive as medium for holding cash reserves. This is something of great importance to for foreign businesses and governments. This also mean reduced investment in U.S. markets from foreign entities and even further devaluation of the U.S. Dollar with more inflation to make up for the Dollars inability to hold value. The cycle continues until something changes. As we all know that there are several money lenders available in the market but the best licensed money lender in Singapore are popular because they charge fewer amount of interest over the allotted money for the convenience for the borrower.
What has caused this?
Many analysts believe the recent credit crunch in the lending market has taken a severe toll on the U.S. economy. Additionally, the housing market nearly stalled this year, and crude oil prices are about to crest the $100 per barrel mark. Not to mention the fact that the U.S. stock market has been more volatile than Coke and Mentos. The Dow Jones industrial Average seems to think nothing of falling 200 points one day and gaining 150 back on the next. Just last week, The Chinese government, the worlds largest holder of cash reserves, indicated that it would be holding more of its cash in Euros instead of U.S. Dollars-this, despite the fact that the U.S. Dollar has been the “go-to” currency for cash reserves for many years. Any one or even all of these factors are contributing to the economic slowdown and devaluation of the U.S. Dollar.
What can be done?
There are several courses of action that can be taken. A decrease in dependence on imports, (especially oil) would do the trick. Of course, it wouldn’t do anymore good than damage unless we can produce the goods cheaper at home. The single most effective action that could turn this around would be to raise interest rates. A gradual hiking of interest rates would increase the cost to borrow while increasing the advantages of saving and investing. This would curb inflation, while better empowering U.S. consumers and attracting foreign investors at the same time. All of which leads to a boost in the purchasing power of the U.S. Dollar. Right now, the Fed Fund Rate stands at 4.25%. Early indicators seem to suggest the Fed has no intentions of raising the rate on December 13th. However, if trends continue as they are, there may be a rate hike in the near future.