What Does the Declining Dollar Say About the U.S. Economy?

by: Jim Kingsland

The dollar fell again on Monday against individual currencies like the euro and pound, but also against the basket of key currencies known has the Dollar Index ($USD). The chart below is something to keep as a reference featuring both the dollar index (candles) and the solid black line which is the 3-month treasury yield.

Many eyes are on the dollar. A failure of 79 won't be a good thing with the key wild card being how overseas investors react to the dollar's decline. Do they stay put, or do they dump not only dollars, but also dollar denominated assets like U.S. stocks?

The inclusion in the chart of the 3-month treasury yield is to show just how low interest rates interest rates fell to by 2004. The last 3 years have been portrayed as a "strong" time for our economy thanks in large part to the housing boom which was fired up by the Fed rate cuts that pushed fed funds down to 1% . The dollar index has been telling a different story about the health of the U.S. economy, and those who have paid attention aren't surprised that the bubble enhancing effects of super low rates, along with bloated federal and current account deficits have come at the cost of hobbling our currency, and lifting the pace of inflation. It's no accident that a diminished currency has led to more costly imports, not the least of them being the price of crude oil.

It will be interesting, indeed, to see what happens to the world's reserve currency in the face of rapidly deteriorating U.S. economic fundamentals, non-stop inflation of the money supply, and s potential Federal Reserve interest rate cuts. Will 79 finally be broken in earnest? Stay tuned.