Got the Dollar Jitters?

The Once Almighty Dollar has been falling against major currencies. Why, you ask? Well, where do we start... Trade deficit numbers in terms of GDP suggest that we've been consuming foreign goods well beyond sustainable levels. And why shouldn't we? Especially if someone is selling us goods cheaper than how much it would cost us to produce those goods and services. Oh, that's right... that whole comparative advantage thing and free trade have offered cheap stuff.

But things have been starting to change. Our greed fueled us to buy more and more, and we didn’t care about running up our credit bill. And our good friends Japan, China and the UK have been more than gracious in providing that credit by buying up Treasuries. Why not, our rates were relatively higher than what was offered elsewhere.

This excess flood of capital allowed many of us to buy homes that we couldn’t afford. In turn, we bought and bought because we could use homes to get even more credit. That’s awesome; only here, can we get credit upon credit. Now that we’ve bloated ourselves, we now have to settle our bill.

Given the not-so-grand outlook of the US economic health, our rates have fallen (you know… because the Fed would have to cut rates in case of a falling economy) below that of other nations like Australia and the UK. Furthermore, Japanese rates may go up, which would leave less room for carry-trade opportunities, especially with the lower US rates. So basically, nobody really wants to buy US assets (not to mention Paulson’s case about the restrictive Sarbanes-Oxley).

Au contraire, export-led countries like S. Korea would want the US Dollar to remain strong. That’s probably why their central bank has been trying to support the dollar. Then on the other corner, you have the Chinese, who also depend on exports to the US, who haven’t done much except indicate that they will start diversifying away from the US Dollar. Well… they’re in a predicament as well, given that they have much invested in the US Dollar and the protectionist-loving US democrats have taken over the house. Given the conditions, most will take tip-toe movements.

Either case, imported inflation looks like they will go up for US consumers... but then again, there is a Federal Reserve research paper that suggests real imports into the US haven't been significantly influenced by exchange rate movements. But that was "real" figures which get adjusted for inflation. That just tells me US consumers have been buying and buying despite higher prices of imports. No inflation… right… tell that to the economists who look ahead (and I didn’t even talk about the tight employment conditions). I don’t think Microsoft’s Vista will save the day with productivity improvements, but we'll see. Mr. Bernanke has a tough job ahead. Slower economy… higher inflation… hmmm… what’s a guy to do? My guess is nothing!

Anyways, this move away from the US Dollar has pushed US exchange rates lower. Follow the money… if you can. But what does this mean for the US? Tune in and find out…