Doubts on the Dollar

A longtime dollar bull has qualms, but strictly short term.

On Friday, the U.S. dollar plunged to a new 20-month low vs. the euro and 14-year nadir vs. the British pound. Plus, the dollar dropped to its lowest level in almost four months against the yen. The dollar's decline was blamed for the "crisis mentality" that had the stock market staggering the past week.

Rapid money growth in Europe means higher European interest rates and a lower U.S. dollar.

A scary new monetary phenomenon double-digit money growth is sweeping the developed world. In Britain, for instance, money growth is now 14.5% above a year ago. Sweden's money supply is up 14.4% over last year. For the entire euro region, the broad measure of money is up 8.5%. In Australia, the growth rate is 11.2%.

Here is what some investors expect: Interest rates in Britain and the euro region will be raised. In the short run, currency markets are all about interest rate returns. Therefore, as interest rates rise in Europe.

I expect a near-term decline in the U.S. dollar as higher European interest rates will make the euro more attractive.

DO NOT FALL PREY TO THE PESSIMISTS' SCARY DOLLAR BASHING ... The more you know about other countries, from Europe to China, the better the U.S. looks. For (the pessimists') gloomy scenario to come true, foreign investors would have to find an alternative to the U.S. dollar. Some day, that might happen. But that will take many years. Meanwhile, a slightly lower dollar will be good for the U.S. trade deficit and hard on Europe's exports.

There will be renewed talk about China selling its huge dollar hoard. But that is nonsense. China is "diversifying", but it is not selling dollars. China is buying higher-yielding dollar-denominated investments and cutting back on buying U.S. Treasury obligations. It is not in China's interests to see the dollar plunge! That would damage China's trillion dollars of reserves and cause enormous problems for China's trade.

You may think... Oh yeah?

That could seem to acknowledge that China's pegging of its currency to U.S. dollar is a purely political decision.

Which means:

• China might change its mind, not necessarily with any warning;


• China might simply lose control of the situation. The underlying market forces might break loose.
  

This scenario worries some observers... What about you??!!