A weaker dollar may offer opportunities, but use care
— -- You've probably heard that the U.S. dollar is in trouble. For example, historians have challenged some of the anecdotes in its autobiography, A Trillion Little Greenbacks— particularly the episode involving Alexander Hamilton, George Washington and 12 quarts of caramel sauce.
But there's no doubt that the dollar has fallen steeply against other currencies recently. The St. Louis Federal Reserve bank's trade-weighted dollar index has fallen 12% since March, and 20% since 2002. The index measures the value of the dollar vs. the USA's major trading partners.
You may be able to make some money from the dropping dollar, but be careful making a long-term bet against the buck.
Why the dollar has fallen:
•Low interest rates. Money tends to flow to the currencies that offer higher yields, all other things being equal, driving up the value of those currencies. A three-month U.S. Treasury bill yields 0.09%, while a three-month German government bond yields 0.36%, and a three-month Japanese government bond yields 0.17%.
•Lessening fear. Investors flee to the safety of U.S. Treasuries when they're terrified. Investors were petrified in March and drove up the value of the dollar. Now that some worries about the world economy have moderated, the dollar has begun to slip.
•Increased borrowing. The U.S. debt load — currently $11.8 trillion — has started to worry investors.
Yet despite the debt, some economists think the dollar could be close to a near-term bottom. "U.S. economic fundamentals have been fairly positive," says Ron Simpson, managing director of global currency analysis for Action Economics.
A lower dollar will "put more juice behind exports," says Brian Bethune, director of financial economics for IHS Global Insight. "Big exporters like GE and Intel and John Deere — you're not going to hear them complaining about a lower dollar."
A $20,000 tractor made in the U.S.A. would have cost 14,187 euros at the end of 2008; it would cost 13,617 euros now.
