This article was written by Bob Bradley, Score Orange County Management Counselor
I admit that I have written similar articles in the past but it is always important to keep things in perspective. Most of the news we receive about the dollar has a political agenda. One party blaming the other for a "weak" dollar or another party taking credit for a "strong" dollar. We write, comment and take sides as if the dollar was the "home team" and we have to root it to victory. When another currency gains in value against the dollar we put it in terms that suggest the "home team" is being challenged and our national pride is at stake. As one economist says, " we should label them 'competitive' and 'non-competitive."
Markets around the world are based on relative strengths of economies. Currencies are no different. When markets are in a panic, which they were a year ago, investors and speculators seek safe havens and that is usually buying US Treasuries. Buyers need dollars which pushes the "market price" of dollars higher because there is great demand for them. The so called "strong" currency that results serves to inhibit exports (our products are more expensive overseas) which is a factor in determining this country's GDP, which measures the growth of the US economy.
Panics always end and investors always seek higher returns when they feel a degree of normalcy has returned. This has happened as investors have marched back into the stock market seeking better returns which has reduced the demand for dollars and thus the "price" to buy dollars. This decrease is what we affectionately refer to as "weak". However, this "weak" currency is actually "competitive" currency as it makes our products more attractive to other countries to buy because they are cheaper. This increases our exports which favorably contributes to GDP growth.
A quick look at the Bureau of Economic Analysis shows that the GDP grew by approximately $150 billion from the 2nd Qtr. 2009 to the 3rd Qtr. 2009. During prior periods, the excess of imports over exports was around $700 billion which is a subtraction from the GDP number. In the 3rd quarter of 2009 this number was reduced to approximately $350 billion, which means we had to subtract less than half the amount from GDP that we did in the past periods. If our excess of imports over exports had continued at the same rate as prior periods there would not have been any GDP growth. In fact there would have negative GDP growth which is a positive way of saying our economy would have shrunk (again).
So before you root too much for the "home team" please consider that you may get the win, but it may not be the victory that you thought it would be.
