U.S. Economic Policies Continue To Weaken The Dollar

Includes: UDN, UUP
by: John M. Mason

The United States continues to get a very bad grade for the way it has…and is…conducting its economic policy.

Here is the grade card for the past ten years: the value of the United States dollar against the major currencies of the world. Note that the general trend of the chart is downward to the right. I would like to emphasize the fact that this is a judgment on both the Bush 43 and the Obama administrations.

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We can, of course, take a longer-term view and show that, with two exceptions, the value of the US dollar has been downwards since the early 1970s. The two exceptions coming when Paul Volcker led the Federal Reserve and when Robert Rubin was the Secretary of the Treasury.

I, again, emphasize that the downward movement of the value of the dollar came both in Republican and Democratic administrations.

But let's concentrate on recent history. With the exception of three periods in the last four years when investors have flocked to United States Treasury securities and, hence, had to acquire dollars, the value of the dollar has again been downwards…or, at best of times, sideways.

The reason for the sideways movements has been the economic difficulties being experienced in Europe. That is, the extreme weakness of the Euro over much of the past four years has contributed some strength in the US dollar.

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Notice that the Euro weakened in October and November last year and again in the spring and summer of this year. These were periods when Europe was feeling extreme pressure to get its act in order and get its finances straightened out.

Each time that the officials of the eurozone have responded to the crisis the Euro has risen in value again against the dollar.

It is amazing to me that American economic policy is so bad that the Euro can actually be competitive against the US dollar. That is, if Europe were not so screwed up, it appears as if the value of the dollar would actually be declining against the Euro much as it is declining against other major currencies in the world.

Just think, investors throughout the world think that the economic policies of the United States are just about as bad as the economic policies of the European Union, taken as a whole.

And, against Asia…the United States is also not doing very well!

Look at the value of the US dollar against the Chinese renminbi.

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Here we see the value of the renminbi getting stronger and stronger over the past five years…and it continued over the past year. People call the Chinese manipulators, but this ignores some of the economic realities taking place in the world.

"Since June 2010, when the renminbi resumed floating, the number of currencies tracking it has increased compared with the earlier period of flexibility between July 2005 and 2008. Over the same period, the number tracking the Euro and the dollar declined." This quoted from Arvind Subramanian and Martin Kessler in the Financial Times.

The authors contend that the renminbi block has now replaced the dollar block in Asia. "The symbolism and its historic significance cannot be understated because East Asia has always been part of the dollar backyard."

The United States is not the economic strength it once was. It is still the strongest nation in the world, economically, but its lead continues to shrink. And, unfortunately, the economic policies it continues to follow will just contribute more and more to its future weakness. As stated above, this general economic policy has been pursued in the United States for the past fifty years by both Republican and Democratic administrations. I see no reason to believe that these policies will change regardless of who is elected in this current political season.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.