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One great thing about the financial markets is that they force us to evaluate trends objectively. The declining dollar is a case in point. It is clear that the dollar is falling against most major currencies and that this decline has been underway for quite a while. Also, as we have seen, the price of oil, commodities and precious metals has been buoyed by the declining dollar.

Here are two charts (click on each to enlarge) that illustrate the long-term and short-term decline. Once you take a look, we can explore what this means for us as investors. Here is the first chart showing recent history of the dollar.

Source: Bespoke Investment Group

The thicker red/green line shows short-term price movement and the thin black line is the 50-day moving average, which shows the trend (down in this case) in a smoother line than short-term movements show. The horizontal line shows that the index just broke through the low point from late last year.

The second chart shows the dollar over a longer period since 2007:

Source: Bespoke Investment Group

The horizontal gray lines show the current period with two previous low points (2008 as the financial panic hit and late 2009). As you can see, we are not at the low point, but we are pointed in that direction.

The impact of the falling dollar on us

When the dollar falls against the euro or the British pound or the Japanese yen, investors in those currencies or stocks or bonds denominated in those currencies will gain. And, U.S. companies that export goods will find their products are more competitively-priced against rival products sold in the hot currencies.

On the other hand, if you’re buying something that is imported or if you are planning a trip to Rome or London or even Toronto, that outrageously-priced cup of coffee just got more expensive. A weaker dollar means we pay more for foreign oil, but we also pay more for any goods denominated in any rising currency. With a falling dollar, 300 million American consumers must pay more for goods made in China, Japan and elsewhere. Is that a good thing? I really don’t think so, but does it mean the dollar is doomed?

Is the dollar doomed?

No. However, as long as the Fed keeps short-term interest rates at near zero, the dollar is likely to be weak. When things get really scary, investors may again flee to the dollar pricing it up, but that would be an interruption of the trend, which should remain intact as long as U.S. interest rates are very low.

Source: What's Down With the Dollar?