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Dollar drops like a rock

 
29 February 2008

The dollar has plunged drastically over the last couple days, falling to all-time and multi-year lows against several major currencies…. … While dollar sentiment has been low for some time, its most recent decline has been largely attributed to growing concern over potential stagflation. Stagflation is a combination of flat economic growth and rising consumer prices.

After surging past $1.50 for the first time ever earlier in the week, the Euro reached an incredible $1.5233 in in today’s (February 28) afternoon trade in New York. After consolidating for several weeks in the mid-$1.40s, the Euro has jumped almost five pips against the dollar since Tuesday.

The dollar had been consolidating against other currencies for a couple months as speculators pondered the currency’s next move. Many financial markets had been cautiously hoping that the US economy would turn around in the latter half of 2008. This hope stemmed from expectations that Fed rate cuts and government intervention through tax rebates and in housing and credit markets would pay off. Currency speculators and stock investors had been taking negative housing, mortgage, and economic news in stride, but they seem to have become overwhelmed this week.

Today, the Commerce Department said the US economy nearly stalled during the fourth quarter of 2007. Earlier this week, reports indicated wholesale and consumer prices had risen by percentages not seen for many years. Stagflation concerns have popped up recently as questions about a recession were coupled with inflation related to growing consumer prices. Oil prices and gold continue to reach new heights and consumer confidence has dropped as Americans become increasingly pessimistic about the economic outlook and their ability to afford necessities.

Unemployment and jobs data has also been less than stellar of late. Fed Chief Ben Bernanke provided some encouraging words today by suggestion current stagflation challenges would not reach the level that devastated the US during the 1970s. Bernanke also indicated more rate cuts are in the cards, another dollar-negative short-term stimulus.

The Fed continues to demonstrate it is more focused on sparking the economy, with inflation taking a back seat for now. Economists are hopeful the Fed rate cuts can get the economy moving before consumer prices get out of control, as the overlap of economic problems and high consumer prices, could reduce the business expansion and spending growth desired from the cuts.

Along with the Euro, the dollar has returned to lows not seen for several months, and even years, against some major currencies. The British Pound is just shy of fetching $2.00 again after dropping back to $1.94 recently. Its all-time high came late last year, above $2.06. The dollar dropped to 105.07 yen earlier in the day. It has not been below 105 yen since it soared through that level in mid-2005. The dollar has fallen drastically against the yen, after setting a new all-time high above 125, last summer.

The dollar also fell below 105 Swiss francs this afternoon, and has dropped about 20 pips in less than a year against the currency. It has also dropped well below one Canadian dollar after clearing $1.57 Canadian a few years ago. These are just a few of the many currencies that have reached multi-year or all time highs against the dollar over the last several months.

Continued dollar weakness, driven largely by market speculation, is an indication of continued weak sentiment about the near-term future of the US economy. While much of the world maintains significant dollar reserves and relies on a healthy dollar for the world economy, the dollar continues to remain weak against other major world currencies. It takes time for sharp dollar weakness to fully impact Americans, but many grow concerned about their ability to buy necessary supplies for their families.

In spite of dollar weakness, the stock market has held up relatively well over the last several months, considering the never-ending onslaught of bad news. Many savvy investors say the point of greatest panic is the best time to buy. Market bottoms are usually events, and as is the case with all speculative products and cyclical economic conditions, the dollar can ‘turn on a dime’ at any point that hope is reestablished.

Market Recap

Stocks were flat across the board Wednesday, the Dow, NASDAQ, and S&P up 9, up 8, and down 1, respectively. Fed Chief Bernanke indicated that more rate cuts are likely. New home sales dropped. New taxes were passed by the House for big oil. Fannie Mae had a huge fourth quarter loss. The stock indexes were off 112, 22 and 12 points, respectively, on Thursday. Comments from Bernanke offered some encouragement that stagflation may not reach the devastating point it did during the 1970s. The dollar tumbled more as it reached all-time lows against the Euro and multi-year lows against the yen and Swiss franc. Oil also reached another new record. Job and unemployment data worried investors. In earnings news, Dell missed analyst estimates.

Neil Kokemuller
Thursday, February 28, 2008
5:05 PM EST

Neil Kokemuller is an Associate Professor of Marketing at Des Moines Area Community College in Des Moines, Iowa, USA. He has a MBA from Iowa State University with a specialization in marketing.

Please note: The information provided in this article is intended for informational and entertainment purposes, and not as advice for financial decisions or investments. Actions taken on the basis of the information shared is at the sole risk and discretion of the individual. Currency investment poses significant risk of loss.

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