What is Going on With the Dollar?
Isn’t America a country with a strong economy and a strong currency? If this is so what the heck is going on with the dollar? The Dow is sitting at 10,785 up 30 points and yet the dollar continues to drop. It dropped today to 986.24 won to the dollar because the Bank of Korea has decided to start selling off its reserves of US dollars, according to the NY Times, due to the sliding of the dollar and shift the reserves to other currencies.
Japan, which has the world’s largest stockpile of foreign currency at $841 billion, has indicated it will continue to accumulate American assets, while China, in second with about $600 billion, has not been buying much more. South Korea’s holdings rank fourth, at about $200 billion, behind Taiwan.
The Bank of Korea indicated in a report to the South Korean parliament that it might keep more of its reserve assets in Australian and Canadian dollars instead of United States dollars. The plan was reported on Monday but had little effect on currency traders, in part because the United States markets were closed. On Tuesday, the news led to a quick strengthening of Asian currencies against the dollar and then contributed to the rise in the euro.
It looks like more trouble may be ahead for the dollar:
“The markets are so skittish right now that seemingly marginal news can have a big impact on the dollar,” said Julian Callow, chief European economist with Barclays in London.
Contributing to that skittishness are questions about the intentions of central banks regarding the dollar. Russia’s central bank has said it is rethinking what proportion of dollars and euros it holds. Some Middle Eastern countries have also suggested they might step up their purchases of euros, at the expense of dollars.
The whole currency thing is so screwed up now that I am shopping more and more on post for things then buying goods off post. I remember four years ago when I was getting over 1300 won to the dollar. Hopefully this slide will turn around. I didn’t study economics in college but but my personal portfolio has had a good steady growth right along with the New York Stock Exchange. I still don’t understand how the dollar drops so sharply like it is now when the economy has been picking up steam? Can any of you economists out there explain this?
What happens if there's war in Korea and everything's devastated, requiring Korea to cash in all the US bond deposits at once to rebuild? Korea's US reserves keeps growing almost $40 billion a year, as it snowballs.
Low US interest rates, influenced by the short-term borrowing rates set by the US Federal Reserve Bank, are the standard economic answer to your question, GI.
The incentive to hold "dollars" (in this case, meaning mostly interest-paying debt obligations issued by the US treasury and held by these foreign governments — Treasury "bills", "notes", and "bonds") is lessened when there are "too many" of these "out there".
Remember that money, to include extremely liquid money equivalents such as securities (stocks and bonds), is subject to the economic law of supply and demand (just as goods are).
If US interest rates climb over the next 2 years as expected by many, then it will become attractive to hold US securities and the decline in the value of the dollar will reverse.
The classic economic dilemma for the Fed is raise interest rates not too fast, lest they go too high too quickly, putting a damper on the economy and causing a recession. This would do wonders for the value of the dollar, but if too many people are hurt by a recession and can't get the "dollars" they need, that won't be much comfort to them (or the politicians they vote for).
I should say the US economy is doing well and will continue to do so due to this change in dollar rates. The last post pointed to one item that people need to remember ? shifting reserves to those currencies that are paying better rates. Another is that as it because more expensive to buy, for example Korean products as you noted this is also true of people in the US. Therefore, people in the US will buy either US or some other countries comparable but cheaper products rather than Korean. (Note I am only using Korea as an example). Additionally, with the lower dollar rate, US products become cheaper to those outside of the US and allows for more US products to be sold which transfers funds to the US and increased the profit of US companies which is why your stocks may have risen. While you may be hurting due to this change in dollar rates when you go on the local Korean economy, the US economy in general gains. In the long run, this dollar rate can hurt the Korean economy since they are an export economy and now their products are costing more. It will all even out over time ? free market volatility. Short answer, but hope it helped.
Thanks everyone I got a better understanding of what is going on with the dollar now. Kind of makes sense. I just got done reading an article in the NY Times that helped lay it out also which was helpful.