Here is my take on the US Dollar; 1. 10 years ago if you traveled or did business outside of US you would see a huge gap between the buying power of USD within United States and most other countries. For instance, if you wanted to hire a nanny in some foreign country you could pay her $50/month, and she would be more than happy to do the job (say your US income was $3000/m). Now if you try to hire a nanny in the same country you will have to pay more than $600/m to find someone, though your income has not increased at the same rate as theirs (you now get $5000/m). Why has this happened? because of globalization. Globalisation has caused product prices to be almost the same around the world, in return this phenomenon has decreased the minimum wage gap between various countries. In basic words; Americans used to be rich just for being "an American" now they are not. 2. I don't think this one requires much explanation; the USD has dropped against all major currencies, even CAD, they used to do this in order to sell their products at more competitive rates in European countries, but now the USD is so trashed I can not see it as a purposeful act in benefit of America. Looking at these charts: http://www.the-privateer.com/chart/g-multi.html you can see that Gold has passed the all time high of 2006 in USD but not in Australian Dollars. references: http://en.wikipedia.org/wiki/Globalization http://oregonstate.edu/instruct/anth484/minwage.html
Are you saying that the exchange rate in real terms has achieved a certain level due to the forces of globalization (ie Purchasing Power Parity), while the nominal exchage rate has been falling to price the US into various markets? If so, I would tend to agree, but this along with a rising foreign price level would suggest a falling domestic price level in the US. I have not seen this.
For foreigners that hold US investments like stocks , the dollar must not be eroding fast enough to give them negative returns based on their home currency or else they would be selling. Is there a critical value that the dollar falls to that will trigger liquidation?
A large part of the run up in stocks, commodities and real estate was caused by the eroding dollar. Because, when you go long a stock, commodity or house you essentially go short dollars there's a certain inverse correlation between the dollar and other asset classes. If you look at the foreign exchange markets this year you'll see that a sharp reversal in that market almost always precedes a sharp reaction in the stock and commidity markets. I remember for example that when the euro fell a few percent against the dollar in a couple of days last december this sparked a sell of in oil, copper, coffee and other commodities. Based on this I predict that when a sharp gain occurs in the dollar versus other currencies this will be followed by a sharp sell off in stocks. But if the dollar retains its slide downwards this will drive equity and commodity markets up even further.
In another thread I discuss this issue and the relationship between oil prices and the dollar. About 50% of the price increase is due to the falling dollar. Alternating weak dollar and strong dollar policies over the last 30 years have been correlated with energy prices. Here is a link to another thread I posted. http://elitetrader.com/vb/showthread.php?threadid=108642
I assume the main reason people believe in the USD is that it is backed by the most powerful country, at least looking from a military point of view, they tend to see it less risky and so with less return. Banks in some countries pay as much as 20% interest on savings accounts that hold the local currency, whereby at the same time the value of their currency has increased against the dollar or even maybe other currencies. For instance if you converted $10K into YTL a year ago (which was 1.5) you would have 15K YTL, now if you put that in the bank they would give you 18% by the end of the year, that would give you 17,700 YTL, if you were to convert that to USD at today's rate (which is 1.17) you would get $15K. That is 50% return on the dollar in one year. This is due to the fact that 1. the usd has lost value 2. the foreign bank is paying a higher interest rate on the local currency
I'm posting a link to a thread in support of your statement http://www.elitetrader.com/vb/showthread.php?s=&threadid=107091
Dollar Falls to Record on China's Plans to Diversify Reserves "The dollar slid to record lows against the euro and the Canadian dollar on speculation China's plans to diversify its foreign exchange reserves will involve selling U.S. assets." http://www.bloomberg.com/apps/news?pid=20601087&sid=alGVN031e30s&refer=home
http://www.reuters.com/article/newsOne/idUSL1262142820071119 In Europe, weak dollar wrecks Americans' dreams "I used to be able to brag that Berlin was really affordable but now my rent actually works out on par with Washington and New York. It's pretty terrible," said Curry, whose income is almost exclusively in the devaluing currency.