Saturday, May 23, 2009

The Dollar

The NYTimes reports that the dollar is weakening:
The dollar skidded to its lowest point in five months this week, battered by creeping fears that Washington’s costly efforts to stimulate the economy are growing harder to finance and may set off an unwelcome bout of inflation. Analysts are increasingly concerned that a rise in prices could hurt consumer spending, deepening the recession.
While the facts are undisputed, some of the analysis is weird as is the title:

As Dollars Pile Up, Uneasy Traders Lower the Currency’s Value

This makes the movements sound almost like some conspiracy, or a mystery. One analyst is quoted to the effect that this is all psychology. But this cannot be right. The dollar has been on a slide for almost a decade due to our excessive borrowing from the rest of the world. The financial crisis caused a temporary reversal in the process -- that was psychological -- fear caused people to hold dollars. But fundamental factors mean the dollar has to decline. While the article presents a graphic for the dollar for the last three months, look instead at the last 6 years.

When you look at the dollar against the euro since 2002 you can see that the economic crisis caused a temporary halt to a longer term problem. And nothing we have done to deal with the recession -- big deficits, lots of central bank credit -- is going to make the dollar stronger in the future.

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