Plunging Dollar-Blessing In Disguise?

11/11/2007 1:05:55 AM
The value of the dollar is heading down the drain, but is anyone paying attention? Quite perplexing is the rumor that is swirling on the Street that the U.S. government is intentionally allowing the currency to depreciate. Rumor mills are churning out stories about how the U.S. Federal Reserve and the Treasury Department are working together to implement a slow devaluation of the dollar rather than allowing a collapse. The predicament comes as a turn of events for the currency, whose reign was once termed as “dollar hegemony” in economic parlance.

The bearish sentiment on the greenback is perceptible from a recent International Monetary Market report that showed that the total value of short positions on the dollar has gone up to $30.73 billion in the week ended October 30th from $27.16 billion in the previous week. The recent down leg of the dollar is due to concerns over the credit crisis impacting the banks and markets. The dollar index, which tracks the U.S. dollar against the currencies of 6 major trading partners, has been on an extended downtrend since 2002 and is currently trading near an all time low of 75.40.

Wachovia Securities expects the downward trend in the value of the dollar that has been place for nearly six years to continue, as the recent dislocation in credit markets has significantly reduced the new issuance of structured fixed income product market, giving foreign investors fewer U.S. securities to purchase. Additionally, the interest rate environment in the U.S. and the rest of the world is supportive of a secular dollar decline. The U.S. central bank is on an easing spree, while most other global central banks have been either holding rates steady or showing an inclination towards tightening. Despite sporadic corrections, the dollar may be heading lower until the end of next year, when domestic economic growth in the U.S. is expected to pick up.

The Canadian dollar reached parity against the dollar in late September, marking the first time it has occurred in nearly three decades. Against the euro, the dollar has been moving to fresh record lows day after day. On Friday, the dollar dropped to a new record low of $1.4754 against the 13-nation currency before recovering some ground. The euro has a different tale to tell. From humble beginnings when it was launched in 1999, the euro faltered to a low of $0.82 in October 2000, but since then it has been in high gear. Against the U.K.'s pound, the greenback is near a 26-year low. Recently, Credit Suisse lowered its forecast for dollar, and said it expects the dollar to fall to $1.51 a euro and 111 yen in three months compared to its earlier estimate of $1.45 per euro and 121 yen.

Since its peak in 2002, the U.S. dollar has depreciated against most majors. The devaluation of the dollar was considered to be inevitable by many analysts, and the anticipated development could engender a global economic crisis, given the buck's status as a reserve currency.