Bill Baruch, president and founder of Blue Line Futures, previews E-mini S&P, Gold, Crude market...
Don’t Push for a Strong Dollar
12/15/2008 12:00 pm EST
John Dessauer, editor of John Dessauer’s Investor’s World, says governments can’t control currency movements and they shouldn’t try.
Many economists are urging the United States to adopt a strong-dollar policy. I have issues with that idea.
First, I have no idea how we could do that. The global currency market is enormous, running 24/7. It is beyond the control of any government or group of governments. Even the strong, coordinated interventions by several countries have no lasting effect on exchange rates.
The ideal currency is one that is stable at an exchange rate that gives that country a pricing advantage. And every country wants its exports to be attractively priced.
Be careful what you wish for: If you ask for a super-strong dollar, you might devastate US exports. Weak currencies are no better. Weak currencies tend to push up inflation and interest rates.
I don’t believe the US can produce a strong dollar or dictate exchange rates on world markets. What the US can do is make sure other countries do not manipulate their currencies to an unrealistic low exchange rate in order to increase sales and profits in the US.
We made an enormous mistake in the 1960s and 1970s when we let Japan get away with a very low yen-dollar exchange rate for too many years. In the early 1970s, the yen rate was 363 per dollar. At first, Japanese-made cars were junk. But they were cheap junk for Americans facing high gasoline prices and gasoline shortages. We will never know for sure, but it seems obvious that “cheap” was the driving force that boosted sales of Japanese cars.
Fortunately, we have not repeated that mistake with China. The Chinese tried to manipulate their currency to gain a price advantage. In 1994, Beijing drove the exchange rate from less than six yuan to the dollar to nearly nine. That is a massive devaluation. A product that cost $100 (600 yuan) suddenly cost $67, a drop of 33%. In addition, wages in China are a fraction of US wages. Washington pressured Beijing to let the yuan appreciate in line with China’s growth. Now, the rate is back to 6.8 yuan and heading back to 6, where it was in 1994.
The bottom line is that the dollar will continue to fluctuate in wide swings, as it has for the past four decades. The dollar is at an exchange rate versus other major currencies that gives “made in the USA.” a slight pricing advantage.
Only the Japanese yen seems truly overvalued versus the dollar. Japan’s currency has risen to 95 yen per US dollar. Exports are a significant part of Japan’s economy. The strong yen is hurting Japanese stocks and the entire Japanese economy. Japan is heading for a more severe recession because of the strong yen.
That will change as global credit market conditions improve. The yen will most likely fall back to 105 per dollar, where it was before the global credit crunch took hold. That will boost Japan’s exports and its stock market.
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