I have been a “Dollar Bear” for most of the 2000s. For the long run, I continue to be a “Dollar Bear”, at least with respect to many currencies in the world. Right now, against the euro and against the British pound, the investment community is telling me that Europe and the U.K. are in worse shape, fiscally and politically, than the United States and therefore I need to alter my stance with respect to these currencies.
The play in international currency markets is, of course, a relative one. How is XYZ nation doing relative to LMN nation? So, one country might be doing miserably, yet another country might be in even worse shape, and, hence, the price of the currency of the latter relative to the former will decline.
This relative price, according to Paul Volcker, “is the single most important price in the economy.” Consequently, “it is hard for any government to ignore large swings in its exchange rate.” Or, at least, it should be!
Right now, the price of the euro and the price of the British pound are saying that the governments in Europe and the government in England should be concerned. Things are not going right and it is costing them and their people.
Of course, there are many monetary and fiscal problems that exist in the United States. But, the markets seem to be saying that, currently, attention needs to be focused elsewhere. And, in Europe and England, the problems are both economic and political.
In Europe, the major focus has been on Greece and the unfolding soap opera that is taking place in the European Union over how the fiscal problems that Greece faces will be overcome. Verbal recognition has been given to the problems faced by Portugal, Italy, Ireland, and Spain, but until yesterday they were being put to the side.
Then, Fitch Ratings reduced the credit grade of Portugal’s debt. The problem, according to a spokesman from Fitch, was that Portugal would struggle to meet its debt commitments in the face of “macroeconomic and structural weaknesses.”
This downgrade, others said, just reflected the concern over “the underlying problems in the European Union. People are worried about the fiscal situation in the southern European economies and the prospects for those economies.”
The difficulties, however, go deeper than that. What has surfaced over the past few weeks is the political problem of running a single currency in a region where there is no single government. This situation could be workable if all the countries within a currency area followed the same fiscal policies.
As is now apparent within the EU, this is not an easy thing to do. Different countries have different national make-ups. They have different histories and experiences. And, they have political parties that are at different places in the political spectrum. The chance that all the countries will follow similar paths with respect to economic policy is “slim” and “none.”
Currently, Germany is getting bashed for the disciplined and prudent policies that it has followed in recent years. No one is doing a better job at bashing the Germans than is the columnist Martin Wolf. (See “Excessive virtue can be a vice for the world economy.") The logic of this is beyond me. Germany has worked hard, kept up its discipline, produces high quality goods, and has an export surplus and should now give up what it has worked so hard for because others have over-promised, over-spent and mortgaged their future? As Wolf argues, the virtue of Germany is a vice in a world economy? Come on, Mr. Wolf!
The European Union is facing a political crisis resulting from its adoption of a single currency. To the most pessimistic, this was always in the works. Paul Donovan, the deputy head of global economics at UBS Investment Bank, stated that Greece, “is going to default at some point” because of the political problems of the EU. He goes on: “If Europe can’t solve a small problem like this, how on earth is it going to solve the larger problem, which is the euro doesn’t work.”
England is also facing economic and political problems. First of all, it has a serious budget problem and very little is being done about it at the present time. This is because of the second problem which has to do with the upcoming election. The Prime Minister, Gordon Brown, doesn’t want to do anything relative to the budget that would further upset the electorate right before the election. However, the Conservative candidate seems to be so inept that he cannot seem to be able to forge some kind of sensible budgetary policy in order to overtake a very unpopular Mr. Brown. World markets seem to have very little confidence with what is going on in the United Kingdom at this time.
The consequence of all this? The euro is trading around $1.33 per euro this morning, down from around $1.51 toward the end of 2009, almost a 12% decline. The British pound is trading around $1.49 per pound this morning, down from around $1.68 in November 2009, about an 11% decline.
The odds seem to be in favor of additional declines in these currencies until some satisfactory resolution is reached on both the economic and the political fronts.
United States officials can enjoy having someone else being in the spotlight for a while. Still, nothing has really changed for the good in terms of economic policy for the United States. Fiscal deficits are large and are expected to remain so for the upcoming decade. The monetary authorities still have to “undo” what they have “done.” The political situation does seem to be a little more stable in the United States than in either Europe or England.
The value of the United States dollar does continue to decline against the currencies of other trading partners, especially against those currencies in the “emerging nations.” Here the trend seems to be for the dollar to continue to decline. The near-term declines continue against the Brazilian Real, the Canadian dollar, the Japanese Yen, the South Korean Won, the Swiss Franc and the Australian dollar.
The United States dollar is not “out-of-the-woods” by any means. And, as we have seen, world investors can turn on a country very quickly. Six months ago, the euro and the British pound were doing quite well, thank you. Government officials need to beware that they still have a long way to go before the investment community can look on the United States dollar with real confidence.
Right now the dollar gets a respite. How long this will last is uncertain at the present time. It is still my belief that over time the United States dollar will come under selling pressure again. It would be best if the Obama administration used this time to re-establish some form of discipline in both monetary and fiscal policy. But, I am not assuming a very high probability that this will happen in the near future, especially with the direction Congress seems to be heading.