While the dollar bears are still partyin’ like it’s 2012 on the charts, other forex junkies are treating the dollar’s weakness like it’s Dynamite for the U.S. economy. Is the weak dollar any help for the US economy, or is it a sign of worse things to come?
If you’ve been too busy playing Cut The Rope to pay attention to the dollar’s price action, then you should know that last week, EUR/USD repeatedly tested the 1.4000 handle, while USD/JPY reached a 15-year low of 80.89. At the same time, gold tapped record highs against the dollar while AUD/USD and USD/CAD are playing near parity levels.
With the dollar taking hits here and there, there are tons of people out there wondering what’s going on. Well, good ol’ Forex Gump is here to answer some of your questions!
The dollar sucks! What gives?
Apparently, dollar bulls are skittish over the bad economic reports that the U.S. economy has been pumping out. For one, unemployment figures have stayed at levels that aren’t enough to support sustained economic recovery. In fact, concerns on the employment, spending, and consumption in the U.S. are huge enough that Fed President Ben Bernanke recently dropped the D-word (deflation) on the markets.
With the possibility of further quantitative easing in the U.S. as real as the new Windows Phone 7, it’s no wonder that investors have been selling the dollar these past few weeks.
Why are exporters happy with the dollar’s decline?
Despite all this doom and gloom, it’s not all bad. Just ask American exporters. A handful of exporters are expecting their balance sheets to look smokin’ hot like Allison Brie with the increased demand they’re getting from Europe and Asia thanks to the dollar’s decline.
Why, you ask?
You see, the weak dollar is making U.S exports cheaper compared to those of other countries because it takes less of their domestic currency to pay for dollar-denominated products.
For example, let’s say Happy Pip lives in Germany and she wants to buy gummy bears from the U.S worth 1 U.S cent each. Given that EUR/USD is now trading at 1.3900, this means that 1 EUR is equal to 1.39 U.S. cents. This means that she’s getting two more gummy bears now than if she had bought them two weeks ago when EUR/USD was at 1.3700. Back then, one euro got her just 137 delicious, U.S.-made gummy bears but now, she can get 139 for the same price! Now ain’t that a scrumptious bargain?
What’s the downside of continued dollar weakness?
But of course, not all of us are exporters. Average Joes and local businesses aren’t exactly giddy with the dollar’s weakness because they will have to shell out more for imported goods and raw materials.
This particular concern is most apparent in oil which is priced in dollars. Word on the street is that OPEC (Organization of Petroleum Exporting Countries) members are already whining to hike the price of oil to 100 USD per barrel because they say that the “real price” of oil is approximately 20 USD less than the current market price. I guess I’m gonna have to cut back on those midnight cross town trips to In-N-Out!
What does this mean in the long run?
With oil priced in dollars, whenever the value of the dollar falls, oil effectively becomes cheaper and hurts oil producers’ profits. With U.S. manufacturers being the biggest oil guzzlers in the world, if producers were to hike their prices, it could prove to be another stumbling block for the U.S. economy.
In the long run, a falling dollar could dampen consumer confidence. After all, a currency is a reflection of how well an economy is doing. If a currency is weak, then it would signal to the markets that the economy is not doing well.
Now let’s take a look at the U.S. dollar index.
Will ya take a look at that? The USDX just formed a doji on the weekly chart and is now approaching a major rising trend line. Is the dollar’s recent fall coming to an end? What do you guys think! Lemme know and post a comment below! Holler!