Wednesday, November 28, 2007

The consequences of the falling dollar


Over the past few weeks the dollar has continued to weaken against other currencies in the world. While I was gone on an Asian vacation, I've noticed certain products already going up in pricing.

A Samsung 50" DLP HD TV was priced roughly $850 before I left, it is now $1200. Average gas prices has risen from $2.90 to $3.10 in my area. My baby's favorite milk formula rose by almost a dollar.

On the flip side, due to the low cost of U.S. goods and services, more Europeans are coming into Florida and other tourist hot spots, taking advantage of resort deals and cheap vacation packages. This infuses much needed capital in areas that are dependent on tourism and areas that have been hit by the real estate downfall.

The cause

Most economists squarely blame the subprime mortgage crisis as the cause of the falling dollar. International investors are scared to invest in U.S. assets because they do not know if the United States is falling into a recession due to the mortgage and real estate crashes. Couple this with trade deficits, continued cuts in interest rates (shows weakness), and the pile of debt continuing to climb from the Iraq war, the international market is anxious about the economic outlook of the United States.

This negative mentality has a cascading effect, with more and more investors looking to Europe, South America, and Asia as possible investment alternatives. Even China, who traditionally pegs their currency below the dollar, is looking to leverage against the dollar amidst their own growth problems.

So what does this mean to you?

  • The sinking dollar means cost of living will continue to rise for the average American. Goods from abroad are more expensive, including oil.
  • Oil prices, which are priced at dollars, will continue to rise as European and Asian countries continue to buy up cheap oil supplies. USD$100 per barrel is cheap to them with their new found value in their currency.
  • Americans vacationing internationally will find that they can buy less things for their greenbacks.
  • Those involved in the retail and exporting business may see a rise in sales due to increased international demand for cheap, U.S. goods.

    How to win financially

    I predict, based on the current credit/subprime issues with American banks and continuing cost of borrowing money for the Iraq war, the dollar will continue to fall well into 2010. It will rebound as the credit markets recover and when Congress stops overspending.

    This means for the next 3 years, my investment portfolio will be more diversified, moving more funds into multinational companies (ie: PLDT) and investing in more foreign instruments.
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