Tuesday, May 03, 2011

A New LOW for the US Dollar

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What does the dollar's unprecedented weakness mean? A lot of things:

It reflects the world's deep mistrust of our monetary and fiscal policies. In a sense, the dollar's value is akin to the price that foreigners are willing to pay to gain access and exposure to the U.S. economy. The very weak dollar is a sign that the U.S. is a very unattractive place to do business these days.

The Fed is supplying more dollars to the world than the world wants to hold. As a corollary, the Fed is setting U.S. interest rates at a level that is lower than they should be to balance the world's demand for dollars with the supply of dollars.

U.S. exporters may get a temporary boost, since a cheap dollar makes it easier for them to undercut foreign competitors. But the cheap dollar will tend to boost the price of all imported goods, and that in turn will increase the cost of living for everyone. Eventually, higher inflation will erode whatever advantage exporters might enjoy today. You can't devalue your way to prosperity.