h1

the dollar is news

Thursday 28 August, 2008

I couldn’t help but come across this article in the Chicago Tribune by Gail MarksJarvis It’s getting stronger on the optimism about the rebounding US dollar.  This was front page news, & even above the fold.  Granted it was published on a Saturday, not a big news day, but it’s rare that currency news gets such exposure.  Obviously this is good for American consumers & the retailers who sell to them as well as the wholesalers who supply the retailers.  Seemingly this is good all the way through the value/supply/demand chain.  US importers can buy more with a strong dollar.

However this is equally bad news for exporters.  Their products which they sell to the world are becoming commensurately more expensive.  American firms have made a lot of inroads based on their price advantage with a weak dollar.  In all likelihood, we will export less, & that will hurt the US trade deficit.

Purchasing power parity is a theoretical concept which determines the value of a currency.  The “Big Mac Index” is a good example which compares the price of a Big Mac in different countries translated from native currencies into 1 comparable currency.  Values of currencies change every minute of every hour of every working day.  Historically, the dollar seems to be very much at the low end of its business cycle.  Determining whether or not the dollar has hit bottom is pure conjecture.  Economists can make predictions, but there are many variables which determine currency values, such as inflation, interest rates, budget & trade deficits, etc., so predicting their direction & magnitude is treacherous.

There are generally 2 risks with currencies changing values-1.  transaction risk, i.e. the value of a transaction changing along with currency value when a transaction is entered into on 1 date & closed on another, such as collecting on foreign accounts receivables after 30 days, 2.-translation risk, i.e. the value of assets, liabilities, & equity changing in dollar terms because changes in currency values over the course of a financial accounting period, i.e. fiscal year, quarterly reporting requirement, etc., such as the value of plant & equipment in another country declining because the currency used in that country depreciates.  Both risks can be mitigated against, but those protections can be expensive.

America used to be the reserve currency of the world, the currency the world would buy in times of duress.  I vividly remember a bus trip from Poland to Lithuania when we were crossing the border, the push that got us across the border was a stack of dollar bills.  With the advent of the Euro, the dollar’s dominance has started to change.  Commodities that were priced in dollars are starting to be priced in other currencies, which decreases demand for dollars, which lowers its value.

Chicago Global Capital has advertised in my e-mail newsletter.  When I spoke with Jim Bristol a few months ago, he was skeptical that the dollar had bottomed out then.  It’s a few months later, so I’m not sure where he still stands.

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