The US Dollar Going Crazy Again!

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Despite what the Chinese want the world to believe, the US is still the world’s largest and most important economy.  Our rampant consumerism leads to huge demands for imports.  The falling Dollar makes other currencies rise… and that makes imports more expensive.

Higher prices make it harder for foreign companies to sell goods in the US.

However, the falling Dollar is great for US multinational businesses.  As the Dollar falls, US products sold overseas become more price competitive.  That means more sales and bigger profits as overseas sales are translated back into cheaper US Dollars.

The big loser… other countries.

How bad is the falling US Dollar for the rest of the world?

It’s so bad other governments are publicly supporting their own currencies in the market place.

South Korea, Taiwan, the Philippines, and even Switzerland are using central bank reserves to buy down their own currency values.

If they don’t act, profits of domestic companies will shrink.

Despite the central bank support, the currency markets could get ugly really quickly.  Think about it.  Many of these smaller countries don’t have the financial wherewithal to influence currency markets over a prolonged period of time.

As a matter of fact, at some point their intervention plans are going to get shelved.  Then the currencies will move wherever the market takes them.

Brazil is trying to think outside the box.

The Brazilian Real has climbed so much the central bank is worried about it negatively impacting growth in the country.  What is the government doing about it?  They’ve imposed a tax on new investments flowing into the country.
 
In other words, if you want a piece of Brazil, you must pay 2% more for it.
This is delaying many planned international investments in the country.  It’s also slowing down foreign exchange for the Brazilian Real.

Some of these countries are now getting some breathing room.  Recently the Dollar trend has changed in their favor… just look at the chart.


See how the Dollar has jumped in the month of December?  This has created some concern in the commodity markets as it’s created weakness in prices… it’s also pushed foreign currencies to recent lows.

Here’s what’s really important… The trend of the US Dollar will be a major factor in currency markets throughout 2010!

Anticipating Dollar trends is going to be more important than under-standing the implications of various economic readings.  Although, economic data will provide some insight into where the Dollar is headed.

For my part, I see the US Dollar moving in lock step with the unemployment numbers.  As unemployment falls, the threat of inflation becomes all the more real… and inflation could lead to interest rate increases… which leads to a rising currency.

So if you want to know where the US Dollar is heading in 2010, just watch the unemployment numbers.  Using that information to trade effectively could line your pockets with the very currency you’re trading!  
 

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