US Dollar Resumes Decline, Higher Inflation and Interest Seen Ahead

 

Washington, DC    April 24, 2006

The United States Dollar fell against most major foreign currencies again today. While that may be of absolute insignificance to most Americans, it certainly shouldn't be.

Domestic interest rates have a direct inverse correlation to the value of the currency. It works like this: the higher the value of the dollar, the more strong and stable the American currency is. This allows the American Dollar to purchase manufactured goods from around the world at low prices. When the value of that dollar falls, it costs more to purchase the same manufactured goods from a foreign company.

The more the dollar falls, the more foreign goods cost. And most goods purchased in this country today are manufactured in a foreign country. Which means that as the dollar falls further, prices for almost everything will increase further.

During the Clinton years, it was the official policy of the US Government to promote a strong dollar. While there were normal daily fluctuations both up and down in the value of the dollar relative to other currencies, the overall trend was up for the dollar.

However, the American Dollar (and any other currency for that matter) can only trend against fundamentals for so long until those fundamentals clash with the trend. And in the long run, fundamentals always win. The Enron's of the world can give the appearance of a healthy, growing company, but if behind the scenes there is something fundamentally terribly wrong, eventually the fundamentals will overrule.

And there are plenty of negative fundamentals for the dollar. Top of a very long list is deficits so huge that literally hundreds of millions of foreign dollars must flow into this country nonstop each and every day. Without that flow of money, our dollar drops. The remainder of the list is too long to go into here. Suffice it to say that the fundamentals of the American Dollar overruled the rising trend during the Bush years and the dollar started to fall.

Last year that falling trend was reversed and the dollar recovered slightly some of its lost value. However, in recent weeks the American Dollar has started falling again. It certainly looks like the downtrend with the fundamentals are starting to take hold again. We've even heard reports from people in the know that the US Treasury Department has printed billions of $100 bills of a slightly different design and has the currency stored in various locations throughout the world as a contingency plan against a rapidly falling dollar. A two-tiered system is envisioned whereby the value of the US Dollar outside the domestic borders will be different than the official value within the country.

While these are merely rumors at this point, what is not a rumor but fact is that the dollar is dropping again. As a result, you can look forward to paying more for most things you purchase. This will translate into higher inflation statistics as measured by the CPI (consumer price index) in coming months, as well as higher mortgage interest rates.

And it is my fear that those rates will be much, much higher than they are today.

 

 

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