The US dollar is collapsing. Every day it is hitting a new low against other major currencies, recently closing in on 1.38 against the Euro. Our government's policy is to crash our currency in order to boost our exports and reduce the real value of the US deficit and debt (it now seems clear that it was a policy of John Snow and is a policy of Henry Paulson). The policy of making US citizens purchasing power insignificant is arguably an unnecessary policy. The US economy is largely driven by intellectual property which doesn't need the boost of a worthless currency. The industries that do need the boost (auto manufacturing, etc.) will become that much less competitive when the boost is gone, and one day it will be gone. And then, of course, there is the impact that this has on all of us - forget buying that new Porsche or taking the family on summer vacation to London these days since these things are prohibitively expensive.
However, there is a benefit to the falling dollar. It is enabling US industry, from GM to Pfizer to Qualcomm, to report stability in their top line revenue where there is no stability and to report growth where there is no growth. It is easy to do. One Euro earned today is now a 15% increase over what one Euro was last year. Same is true for a British Pound. If your company holds its foreign earnings steady, that is a 15% increase in foreign earnings without doing anything. If half of a company's earnings come from abroad, there is your 7.5% growth, voila. CFOs have tremendous discretion in determining how and when to convert their revenue to US dollars for accounting purposes. Every US company is using this to its advantage today. It should be noted that the ability to actually repatriate currencies is often subject to less discretion and is often impacted by tax consequences and bilateral tax treaties.
On top of the earnings boost from a weaker dollar, we are seeing further appreciation by virtue of the fact that our equity markets are international. The weak dollar is making US assets attractive to foreign investors, with many companies suddenly becoming targets. Vodafone for example switched from being a potential seller of its 45% stake in Verizon Wireless last year to a potential purchaser of all of Verizon this year.
I am concerned that the US dollar strength cannot go on forever. A reversal would cause earnings to fall and our assets to be less attractive.
Meanwhile, I am also concerned by how the weakness in the dollar will affect the bottom lines of European companies that sell huge volumes in the US - the major European pharmaceuticals and the Nokias and Ericssons of this world. These companies will at some point need to convert (if even only for accounting purposes) their weak dollars back into their own currencies.Related Articles:
Nicolas Sarkozy's New Hampshire Vacation by soczie - Aug 11, 2007
Dollar Falls to Another Low Against Euro by Thomas Bivens - Sep 26, 2007
Weak Dollar Killing Canada by H Greenleaf - Nov 04, 2007
Stephen Roach Commentary on Declining Dollar by JRodgers - Sep 25, 2007
Presssure Grows in europe to rethink Inflation targetting by JRodgers - Jul 18, 2008.
