Joe Barbieri
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Why Is the US Dollar Falling Against Other Currencies?

There are two common beliefs about the US dollar. The first one is that the US dollar is a safe haven currency in times of trouble. Whenever there is a crisis, the dollar is used as a safe haven until the storm has passed. (2)(3)(4) The second belief is that the US economy is perceived to be doing better than the rest of the world. This perception is reinforced by the Federal Reserve “tapering” program and the recent economic numbers. (5)(6) Why is the US dollar falling compared to other currencies?

There are some assumptions that should be kept in mind. Currencies are a relative game. A currency does not have any intrinsic value in and of itself, but it is compared to other currencies via the foreign exchange rate market. If you have a situation where all of the currencies are getting stronger at the same time, you will not notice this in the foreign exchange rate. Where you will see this is when you look at how many physical goods a currency can by. A currency is a measuring stick that measures everything that is bought and sold – and most of these items are physical goods. There are things like contracts, patent ideas, derivatives and promises that are valued with currency as well – but these would also change with the currency value and not require a different amount of measuring units (i.e. dollars) for their value. The trend recently for all currencies is that they are buying fewer and fewer goods each year. The rate at which this is happening is debatable if you believe the official inflation numbers or you believe they are higher. Either way, we are not in a deflationary scenario, which is when the currency can buy more physical goods over time instead of fewer.

Currencies are relative – but isn’t the U.S. economy still ahead of the rest of the world which means the dollar should still rise? This is where it gets interesting. If you look at the main competitors to the dollar- the Pound, the Euro and the Yen, this appears to be true. It seems the truth is closer to the fact that all of the world economies are sluggish. Unemployment is high in all of these areas, the housing markets are down considerably, and GDP is very small compared to past years. There are also a lot more people relying on the government for their livelihood which means that money is being recycled and goods are not created. The money that is being “printed” is not translating into goods, which is why all of the currencies are relatively weak.

Does the weakness in the U.S. dollar come from the economy actually being worse than the developed world, or is the dollar going down for other reasons? Either way, the recent trends in the U.S. dollar are not easily explained.

Sources:

1)      http://www.marketwatch.com/investing/index/dxy

2)      http://www.dailyfx.com/forex/education/trading_tips/daily_trading_lesson/2012/05/10/USD_the_worlds_safe_haven_js.html

3)      http://www.merkinvestments.com/insights/2014/2014-04-29.php

4)      http://www.marketwatch.com/story/dollar-regains-footing-vs-yen-2013-04-17

5)      http://www.bloomberg.com/news/2014-05-07/yellen-says-high-degree-of-accommodation-remains-warranted.html

6)       http://www.forbes.com/sites/kitconews/2014/05/07/gold-sells-off-on-yellens-upbeat-assessment-of-u-s-economy-and-as-putin-blinks/