Discussion in 'Economics' started by doug456, Nov 26, 2003.

  1. doug456


    can someone explain to me how the dollar effects the markets? this is something i've never understood and can't seem to find a good post on it here. is a stong dollar good and a weak dollar bad? when the markets go up does the dollar go down? why do some companies want a weak dollar?
  2. vak


    all in all the dollar is the world's valuation of the US economy.....the currency crosses are some sort of auction house where people buy&sell the entry ticket for investing in the US economy....allways interesting to compare it whith the local stock market (joe's valuation of the economy)
  3. Pabst


    Exchange rates between currencies' are largely based on interest rate differentials. If a nation's economy is solid, it's Central Bank is likely to keep short term lending rates relatively high. Higher rates mean certain investor's prefer to remain domiciled in a currency where they can earn a comparatively risk free rate of return. In reverse, a weak economy demands accommodative lending practices that are often less attractive to foreign yield seeking capital. The present situation with the U.S. Dollar is not so much a reflection that the U.S. economy sucks, as much as it's a statement that many global economies who were outpaced by the U.S. in the 1990's are rapidly improving. Thus higher than U.S. interest rates in Europe are fueling strong demand for the Euro and the pound vs. the greenback.

    While the correlation between the dollar and U.S. equity indices is tenuous on a historical basis, the safe assumption is that a weak dollar is bullish for U.S. stocks. Since the U.S. imports far more goods than it exports, a weak dollar prices out foreign competition for products sold domestically. For example it would be difficult for Mercedes Benz to lower the prices on it's cars sold here in the States because they are already receiving cheap dollars in return. To keep this example simple, a 600SL that was worth a 100k in both Euro's and Dollars when the two currencies' were at parity, sells for only the equivalent of only 83k Euro's in present dollar terms. Hence Mercedes' is taking a big hit vis a' vis the exchange rate and will not be willing to lower prices which would only further dampen profits. The Big Three (GM, F, DCX) however can now charge higher prices knowing that those raises will not be checked by foreign auto manufacture's low balling the process.

    So in answer to your question, it would seem in this present environment that a weak dollar continues to be a bull item for most U.S. stocks.
  4. Excellent post... as lucid an explanation as any..

  5. Do yourself a favor, study and learn the concept of "Seignorage," and all of its implications.

    Once you understand this you'll begin to see how truly catastrophic an extending dollar decline can and will be to U.S. Dollar holders and more broadly the impact it will have on the American way of life.

    Dr. Zhivodka
  6. Pabst


    Dr. Zhivodka,

    This article was precipitant in predicting the demise of the dollar as the benchmark global reserve currency.

    This thread was not a forum to allow me to espouse my belief's about how a debased currency leads to a debased society. Rather I merely answered the obvious. This bull run in stocks has been fueled by a cheap dollar. Mere TA makes that conclusion apparent. Of course whether the administrations weak dollar position is long term suitable is questionable.

    I'm not an advocate of a weak dollar. However on a macro basis, the dollar isn't all that weak. The pound is a 1.70, Yen 109, Aussie and CD in the 70 cent ranges. Merely a snap back from a ridiculously overpriced $ to acceptable equilibrium. There is nothing on the U.S. fiscal or monetary front that put's us on unequal footing with competing currencies. All world government's are spending out of control and faced with debt, aging population's, and potential unmarketable credit obligations.

    The weakness here is purely interest rate driven, not because Japan and Europe, let alone Canada and Australia are paragons of fiscal prudence. If the Fed jacks up the Fund's target 150 basis points the dollar will be back at par against the Euro, pronto.

    I do agree though that unless the Fed responds quickly and in meaningful fashion to the ramp up in U.S. price acceleration, there will be dickens to pay for dollar holder's. In the past 20 years I have traded perhaps 4 million contracts in Bond futures with probably 80% of my trades initiated from the short side. I can attest that being the oracle of doom toward U.S. Treasury securities has thus far failed to be the winning ticket. Maybe in one fell swoop, investor's will realize that all of this global government debt issuance is at best suitable for wall paper.
  7. You don't think Mercedes hedges in the currency markets to compensate for exchange rate changes?
  8. Pabst


    Most certainly. If not they could get blown out of business on a move to 140. However it's a difficult hedge, or less no one would have exchange risk.While hedging allows them to remain profitable in the U.S. market, in a business where 3% a unit is a bankable margin, dollar weakness gives them no elasticity for price cuts. Think back the other way though. When the $ was on fire, German and Japanese cars were in price wars over here.
  9. vak


    "Exchange rates between currencies' are largely based on interest rate differentials"

    the key missing word here is expectation, hence the rates at whish pairs like GBP/JPY , EUR/JPY are trading at.

    in the run currency trader love inflation fear/expectation when it occurs in developed countries, and in the current environment
    inflation is a sign of ecnomic health.

    when seen from this viewpoint EUR/USD's projection for the long run (stretching from 1.3 to 1.6) are overly bullish

    it seems to me that the comon currency is well valuated in the 1.25-1.15 range and that any further weakening of the US dollar, should it occure, will mostly take place against currencies
    of the pacific-zone.
  10. rodden


    Your argument is based on the supposition that the USD is merely normalizing; I believe the good Dr. Z was making reference to "an extending dollar decline". If the Fed inadvertently overshoots its target dollar range the results could be a cascading catastrophe. It's all a house of cards; even if it's not a house of cards it's still a house of paper.
    #10     Nov 27, 2003