More trouble for the U.S. Dollar?

Recently, the FED has substantially cut rates in response to the growing recession fears that have spread into the minds of more academics and economists. Although the possibility of a recession is no small matter, the FED has seemingly ignored another major problem facing our economy and financial well-being.

Our US Dollar has resumed its downfall against other major world currencies, most importantly the Yen and Euro. After a mid-December rally, the USD has plunged to new lows again compared against both currencies. Despite a global credit crunch and recession worries in Asia and Europe, the FED typically acts most rapidly and decisively when problems arise. On this positive note, we can expect the other central banks to begin cutting rates sometime later in the year as a more reactionary measure instead of a combination between reaction and precaution. Asian growth is still expected to maintain, but interest rates have risen to unhealthy levels. Meanwhile, Europe seems a few months behind the US economy in the GDP cycle, so slower growth may not be realized until the late 3rd or early 4th quarter of this year.





One solution to the falling value of the Dollar the FED has yet to utilize is the mop up of excess money floating around throughout the economy. Unfortunately for the US central banking arm, excess liquidity has been necessary in a marketplace stricken with tightening credit standards and loan requirements. As the financial sector continues to right itself (with the help of much needed investment from the private sector and abroad), the FED may begin to start diminishing some of this exorbitant amount of dollars. Hence, less supply will help drive the USD's value back in the right direction.

Another big sell-off, but was it healthy?

As US economic growth wavered in Q1, coupled with a few big sell-offs in the equities markets, stocks steadfastly rebounded and repeatedly approached new record highs. Taking into account the vast amount of negative numbers regarding economic data, equity prices fearlessly drove higher, despite predictions by several top economists and market analysts that a recession was near. A key basis point of these bears centered around the inverted yield curve, a unique phenomenon which has been succeeded by a recession every time it develops.

Low and behold, several months and vastly higher heights later, another pair of significant sell-offs occurred. This time however, these bears are missing a significant piece to their pessimistic puzzle. Finally, after years of mismanagement by the FED and US Treasury Dept., the yield curve has begun to normalized. The inversion has reversed, as long-term treasury yields have overtaken the 90-day T-bill rates.



Another issue the bears seemed to dwell on regarded weakness in the US Dollar. Many argued that global equity markets would continue to prosper while US stocks would take a significant hit because of the weakness in profitability between exchanges in currency rates relating to asset levels and market capitalization. Unfortunately, these bears failed to realize the global impact and success of American companies abroad. Giants such as General Electric, United Technologies, and Boeing continue to impress and solidify market share across the globe. Therefore, these revenues made abroad will translate high relative to the USD, failing to impact corporation's balance sheets like pessimists believed they would. In addition, the Dollar has continued to climb against the Yen and made a good comeback against the Euro recently.

Therefore, don't expect a large correction over 5-6% anytime in the near future. The US economy is going strong and stock slumps are supposed to be caused by Bond yield inflation, not computer glitches. This is a natural cycle and valuations are still appealing in the equity markets.

Protectionism is a double-edged sword

Sen. Hilary Clinton continues to lead the protectionist rampage on the political front, she has yet to provide any hints as to her solutions to the various problems that are certain to arise should she win and enact her regulations. Protectionism has both positive and negative effects, the later of which Clinton ignores.

I doubt anyone questions the concern over the amount of outsourcing that has taken place since the early 1990s. Something needs to be done to revitalize the US economy, that isn't debatable. The methods for achieving the end means is where politicians and economists seem to differ.

Clinton tends to suggest that Protectionism will help keep jobs inside of US borders, lower the trade deficit and ultimately act beneficial to the overall economic well-being. She doesn't seem to realize that the trade deficit has no net affect on the United States. Entities and people trade, not countries. She should be more focused on U.S. GDP Growth rates because various factors influence trade, including tariffs, tax rates in respective countries and currency conversion rates.

If you look at Hilary's plan, implementing policies to force companies and Americans to buy home-grown products will certainly result in significant spikes in inflation. She doesn't seem to have any grasp of this concept. If strong tariffs or other protective measures are enacted, those goods that will be then produced by workers in America will most definitely be higher in price due to the wage and benefits difference.

Another key consequence on protectionism is a stronger US Dollar. Although some argue that would be beneficial for the United States and her citizens, this would only hold true when trading or converting currency or wealth with other countries. An inflated currency has proven to be part of the problem with outsourcing because a higher USD makes foreign imports cost less and become more attractive. This is a central factor in the massive import problem the US faces. Should the USD fall relative to the Asian currencies, which it still has yet to do, demand for US exports will rise dramatically.

The double edge sword comes into affect if the US Dollar were to fall too quickly, lowering the value of personal wealth and ultimately creating inflation simultaneously. By any means, the situation is complex and fragile, something Sen. Clinton needs to realize soon.