Monday, October 12, 2009
Here are two versions of the dollar's value against other currencies. The first compares the dollar in nominal terms to a trade-weighted basket of major currencies (Euro, Yen, Pound, Canadian dollar, Swedish Krona, and Swiss franc), while the second compares the dollar in inflation-adjusted terms to a very large trade-weighted basket of almost all currencies.
By either measure, the dollar is very weak and looks to be trending lower. The dollar is weighed down by extremely accommodative monetary policy, by profligate fiscal policy, by the specter of increasing regulatory burdens, by high unemployment and weak economic growth, and by the prospect of trillion-dollar deficits for as far as the eye can see.
Everyone knows this, though—it's all on the front pages every day—and that arouses my contrarian instincts. With the dollar's value against other currencies and against gold near the bottom of historical ranges, it is undeniably cheap. It could get cheaper still (and I'm reminded here of Art Laffer's admonition that fiat currencies have no intrinsic value and can therefore be in perpetual decline), but selling the dollar at this point implies considerable risk.
When tons of bad news is hitting the tape everyday, and the value of the asset in question has fallen to historical lows, to be bearish on the asset requires a firm conviction that things are going to go from very bad to really, really bad. For the dollar to rise you don't need to see good news, you just need to see news that is not awful. Mere bad news might suffice to keep the dollar from falling further. Modestly good news, such as an early move by the Fed to raise interest rates even by a little bit, or news which shows the economy is likely to simply avoid a double-dip recession, or news which indicates just the tiniest rightward shift in fiscal policy, might be enough to push the dollar higher.
It's hard to fight the tape on this, but I continue to believe that the long-run prospects for the dollar are favorable. I think the economy is doing better than most give it credit for, I think the Fed is going to move sooner than most expect, and I think that policies in Washington are going to turn out to be less awful than the market fears. I'm not saying that everything is going to turn rosy, merely that I don't see things getting worse forever.
Posted by Scott Grannis at 12:19 PM