More Thoughts on the Dollar

Includes: UDN, UUP
by: Bob McTeer

Following on from my previous post, the dollar can be boosted in very indirect ways. Given the zero-sum relationship between the nets of domestic investment and domestic saving, government spending and taxes, and exports and imports, an imbalance in the first two categories will require a balancing change in the third category, which is the current account balance. While many factors influence that balance, the exchange value of the dollar is one of the principal ones.

Given the explosive growth in the budget deficit recently and prospectively, positive growth in domestic investment relative to domestic saving will require a larger current account deficit to attract a larger capital inflow. It seems counterintuitive, but this need for foreign saving to supplement domestic saving in financing domestic investment will put upward—yes upward—pressure on the dollar.

That probably wouldn’t be a good economic outcome since it perpetuates global imbalances, but it may satisfy those who want a stronger dollar above all else. And, it may be a better outcome than having investment fall to match a diminished flow of saving.