After a steady decline, U.S. currency stages a big comeback
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Six years after the U.S. dollar began steadily nose-diving to its lowest point ever against other major currencies, the venerable greenback has staged a remarkable comeback.
In the past two months, the U.S. dollar has regained about 20 cents in purchasing power against the euro and about 30 cents against the British pound sterling since it fell to a historic low against several foreign currencies in March.
"It is a rally and it's a good thing for U.S. taxpayers and consumers," said Michael Woolfolk, a currency trader for Bank of New York Mellon in New York. "A stronger dollar means lower inflation and more foreign investment."
While many analysts are speculating on how high the dollar's exchange rate will rise, others wonder if the rally can endure in light of the unprecedented crisis that is rattling Wall Street.
Financial markets have grown even more uncertain amid the dramatic events this week, which included Lehman Brothers filing for bankruptcy, Merrill Lynch being taken over by Bank of America, and the Federal Reserve agreeing to bail out insurer AIG to the tune of $85 billion.
Then there's the $25 billion taxpayer cost to rescue the mortgage giants Fannie Mae and Freddie Mac earlier this month and the $30 billion tab to bail out Bear Stearns in March.
"The dollar should be falling off the edge of a cliff right now, but it's not," said Peter Schiff, president and chief global strategist at Euro Pacific Capital in Darien, Conn. "If the government had not saved Fannie Mae and Freddie Mac and the mortgages they insured, the dollar would be plunging."
Dr. Sandra Phillips, assistant professor of finance at Syracuse University's Whitman School of Management, believes the sheer magnitude of the recent turmoil in the credit markets will put downward pressure on the dollar.
Bailing out Fannie and Freddie was a stopgap measure to strengthen the dollar temporarily, she said, but because of the recent events on Wall Street and the Fed's response to them "we're back to square one as far as the strength of the dollar."
"Because of these developments, the value of the dollar will drop because of this continued level of uncertainty," Dr. Phillips said. "Eventually it will strengthen when things settle. But there's too much risk in the market now."
The dramatic turnaround in the dollar's destiny that began in July might not be so much a vote of confidence in the U.S. economy as it is the fear that other economies around the world are doing worse.
Robert Dye, a senior economist at PNC Financial Services Group, said the greenback is recovering from an oversold position as cooler conditions become more obvious in Europe and Japan.
"As the dollar increases in value it does drive oil prices lower, so that's good news for American consumers," said Mr. Dye, who explained that the dollar and oil prices traditionally move in inverse directions.
As more foreigners funnel cash into U.S. stock and bond markets, it usually pushes up the value of pension plans, 401(k) accounts and other stock holdings while driving down bond yields, making it cheaper to borrow money. A stronger U.S. dollar also helps maintain its unique role in foreign exchange as the world's reserve currency.
Not long ago, former U.S. Federal Reserve chairman Alan Greenspan said it was possible that the euro could replace the U.S. dollar as the reserve currency of choice. Many high-profile celebrities were expressing a preference for being paid in euros instead of dollars, and early this year New York businesses were displaying signs in their storefront windows stating "Euros Accepted."
How times have changed.
As the dollar fell in value over the past six years, gold prices -- which have an inverse relationship to the dollar -- soared to more than $1,000 an ounce in March. Likewise, the dollar's rise has been matched by an equally dramatic decline in the price of gold, which dipped below $800 but has rallied somewhat in light of the uncertainty on Wall Street to close yesterday at $892.70 an ounce.
Although the dollar has enjoyed an impressive uptrend in recent weeks, it gave up some of its gains against the euro due to this week's events. It may be worth keeping the rally in perspective with the dollar's long-term trend, which billionaires such as Bill Gates and Warren Buffet believe is down.
Another economic pundit who is pessimistic about the dollar's future is Tom Donlan, editorial page editor for financial publication Barron's and the author of "A World of Wealth."
"I don't believe [the rally] is a permanent reversal in the fate of the dollar," Mr. Donlan said. "The fate of the dollar is to decline unless we make serious changes in our fiscal policy as far as reducing the deficit and reducing federal spending."
But the clearest manifestation of the stronger dollar is the greater purchasing power of U.S. shoppers and tourists abroad.
Vacations and trips to foreign countries have become better bargains for travelers. More buying power also tends to boost consumer confidence as the shift in exchange rates make U.S. citizens feel wealthier.
How long it will last, though could be anyone's guess.
With world economic markets showing more signs of weakness, the dollar is likely to gain more momentum from the notion that the United States is the safest place to invest in times of global crisis, said Robert Gibb, a financial adviser at Hapanowicz & Associates, Downtown.
"There's more dollars coming back to the U.S. in the form of Treasury (bond) investments," he said. "The U.S. economy is the largest and strongest in the world and it drives other world economies. You don't bet against the U.S. markets."
First Published September 19, 2008 12:00 am