Update: The dollar's wild ride on the global currency seesaw

International Herald-Tribune: “Currencies: Dollar seen digging itself into deeper hole on rates”
Reuters: “Dollar little changed after selloff”
International Herald-Tribune: “Little risk for the U.S. as the dollar weakens”

Reports are mixed. The dollar continues its ride on the global currency seesaw. The dollar is bouncing back…the dollar is digging itself into a hole…speculators may buy dollars despite last week’s fears of a selloff to take advantage of typically low December values…a declining dollar is not necessarily a bad thing…

Despite conflicting views about what recent currency fluctuations mean, most reports agree that future market behavior with respect to the dollar depends on whether the Federal Reserve moves to cut interest rates to stave off inflation as expected…and whether the European Central Bank (ECB) raises rates in response to the surging euro. Another key factor is the U.S. Department of Labor’s monthly jobs report, which is expected to show a rise in November hiring, a good sign for the U.S. economy among the host of indicators showing continued slippage (e.g., the continuing trade deficit, dips in the housing market, and decreased output by manufacturing interests).

For an idea of what the actual numbers look like, here are some key currency valuations from this morning (December 4, 2006) in New York:

“The euro traded down 0.01 percent [against the dollar] to $1.3329, off an earlier 20-month low of $1.3367…[and] hit a record high above 154.10 yen before falling back to 153.78. The dollar was steady at 115.35 yen after hitting a four-month low below 115 on Friday.”

From a lay perspective it is interesting, if not utterly confounding, that the variations in value at the heart of all this speculation amounts to fractions of a cent on the dollar. However, it is important to keep in mind that what seems miniscule on a micro- level adds up on the macro- level. Fractions of cents on the dollar (or euro, or yen) must be considered in light of all the dollars (or euros, or yen) in circulation. It adds up.

Consider: The dollar has dropped 11% thus far in 2006. Nearly 4% of that fall occurred in the last two weeks. Is this good or bad? It depends. A dollar that falls too quickly and too far is dangerous for the U.S. economy, but a dollar that is weaker against the euro and Asian currencies could help with the U.S. trade deficit and by extension the nation’s currently faltering economy.

For perspective, note that the ECB doesn’t want the euro to climb too high. Strong exports--driven by a lower-valued currency—are considered by many to have been the key to the burgeoning EU economy. The moral: seek moderation in all things, especially currency values.

FOR DISCUSSION:

1. Even with a reasonably weaker dollar in relation to European and Asian currencies, the U.S. plan to improve exports and decrease the trade gap is undercut by the fact that the Chinese yuan is still pegged to the dollar. Given that China is a major U.S. trading partner and competitor, how will the U.S. be able to benefit from a weaker dollar if China does not revalue its currency?

RELATED:

See December 1, 2006 "Notes & Developments" posting, "U.S. dollar ahead in global currency limbo..."