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Shrinking Dollar Power – Monetary Globalization Affects the Strength of U.S. Currency

by Stephen Koneg

The almighty dollar, as it was dubbed by a US newspaper in 1836, is now on skid row, and whether you realize it or not, the power of the U.S. dollar does not hold the same global power as its glory days. Leaving today’s global markets to question the future economic viability of the U.S. dollar. With recent manufacturing incentives in Asia for leading American OEMs (original equipment manufacturers), China's trade surplus has hit a new record of USD 26.9 billion -- half of it coming from the “land of the dollar”. Tumbling to all time lows, the euro has catapulted against the dollar above $1.41 as the U.S. dollar continues to soften considerably within the global market. This record low has hit parity with Canada's currency for the first time since 1976, proving the dollar’s woes to be far from over.
In recent months financial reports shows the U.S. dollar losing significant buying power against the Euro. In the last 12 months, the dollar has declined 8.9 percent against the euro and 9.9 percent against the pound. Ironically, the currency of the Euro continues to be strengthened and Europe’s economy continues to be fuelled by export growth into many countries. Whereas, America continues to struggle with export strategies to compete in today’s global market.

Trouble for American Tourists

On a lighter note, tourism statistics in France, Germany, Spain and other countries, shows the number of Americans visiting Europe has increased in 2007, even as the value of the dollar has eroded. Travel experts say this speaks both to the resilience and rising affluence of American tourists, as well as to the perennial appeal of Europe as a destination. Travelers and tourists now fully understand the impact a few cents has on currency exchange. For instance, when visiting a European country for a week-long family vacation, currency exchange is a significant factor. Meaning, a 200 euro/night hotel room in Paris for a week now costs approximately $1,638 in U.S. dollars. With rising cost of a vacation in one of the 12 European nations that use the euro as their currency,

Five summers after the dollar began its long swoon against the euro and the pound, American travelers have gotten used to $5 cups of coffee and triple-digit dinner checks in Europe’s great capitals.

But the dollar’s latest plunge — to record lows of $1.41 to the euro and $2.05 to the pound — has turned mere sticker shock into a form of disbelief for many tourists. The US dollar has fallen nearly 30 percent against the euro since this time last year. That makes everything 30 percent more expensive for US tourists - an especially significant consideration at a time of falling stock markets and economic slowdown. More importantly, if the euro keeps getting stronger, Americans will have less spending money for sightseeing, shopping and other miscellaneous activities that boost tourism sales.

Currency	In US Dollar	Per US Dollar
Argentine Peso	0.31837	3.14100
Australian Dollar	0.86775	1.15240
Brazilian Real	0.53662	1.86350
British Pound	2.02675	0.49340
Canadian Dollar	1.00271	0.99730
Chinese Yuan	0.13329	7.50250
Euro	1.41163	0.70840
Hong Kong Dollar	0.12853	7.78010
Indian Rupee	0.02522	39.65300
Japanese Yen	0.00869	115.05001
South Korean Won	0.00109	921.02001
Mexican Peso	0.09131	10.95150
Russian Ruble	0.03946	25.33900
Swedish Krona	0.15363	6.50920
Swiss Franc	0.85470	1.17000

The Incredible Shrinking Dollar

Devaluing the dollar is the market’s way of correcting the U.S. trade deficit. Former Federal Reserve Chairman Alan Greenspan warned us repeatedly over the last few years that either the value of the U.S. dollar or the trade deficit has to decline. Both cannot continue rising. After a long period of infatuation with high growth rates and a rising stock market in America, investors are now paying closer attention to the US trade deficit and other structural problems with the US economy, says Mikael Schubert, a currency analyst with Commerzbank in Frankfurt. As a result, smart investors are moving in droves out of U.S. dollars and into foreign currencies, commodities and gold.
Financial experts conclude that the U.S. dollar has been overvalued for some time now. The primary contributing factors that explain the origin of the incredible shrinking dollar are the Federal Budget Deficit and the Mortgage Market. The Federal Budget Deficit is out of control and the U.S. has allowed foreigners to purchase approximately 97% of its debt over the past 6 years. Likewise with the Mortgage Market, growing mortgage debt has been consistent over the past 5 years, and the savings rate in the U.S. has actually turned negative for the first time since the Great Depression. That on top of foreigners having purchased approximately 97% of US debt issued over the span of the last four years. You don't suppose that those hundreds of billions of mortgage-backed securities that we've sold foreigners over the last 10 years, the vast majority of which can not be sold now for any price, has something to do with the fact that the dollar is dropping?