The Sinking, Shrinking Dollar
By Carol Webster, Cassel International
I can remember when the Euro first came into being, and all the talk was about parity between it and the dollar. Today, the mighty Euro will buy about $1.54. In fact, the US dollar has dropped around 45% from its peak against the Euro in 2002. and not only has the Euro gained strength against the dollar, the British pound, the Canadian, Australian and New Zealand dollars and the Indian rupee have all posted record all-time highs against the dollar as well.
What does this mean in the international community? Well, first of all, it means that April in Paris, or a visit to the famous Christmas markets in Europe, are now out of reach for many Americans. It means that Europeans and others are flocking in greater and greater numbers to the U.S., to sightsee and more importantly, shop, which does help boost tourism and the economy of hot tourist spots!
For U.S. companies interesting in exporting to Europe, it means their products are much more attractively priced, and they have the ability to earn higher profits on exports than ever before. Overall, a weaker dollar makes U.S. goods cheaper and more competitive overseas, which can help reduce the massive trade deficit the U.S. currently has built up over the years.
It also means that overseas firms are acquiring U.S. companies at a rapid rate. According to Thomson Financial, the value of all these acquisitions during the first nine months of 2007 was more than US$257 billion! Just one example - the huge investment (US$7.5 billion) in Citigroup made by the Abu Dhabi Investment Authority in late 2007.
The Federal Reserve's cuts to key interest rates in recent months have contributed to the weakening of the dollar, and furthered the expectations worldwide that the U.S. economy will continue to be slower than that of other countries. This means that investors are also looking at moving their capital from the U.S. to other countries in order to maximize their returns.
The next 12-18 months will be an interesting time, with predictions for the U.S. dollar ranging from further weakening, to status quo, to a steady but slow strengthening.