Thursday, May 04, 2006

Dollar is Going South

The ever reliable Billmon discusses international finance and the recent rapid increase in the price of gold. He is most likely correct in that it is most likely due to central bankers switching from holding dollars to holding gold. Not a good sign.

The dollar has slipped down to $1.27/Euro. While this is not the worst that I have seen it is pretty darn close. For those of us that spend a lot of time in Europe this kind of exchange rate is very painful. It has been hanging around a $1.20 for the last few months but it has made a quick fall to this latest value. Let's hope this trend changes course but a lot of people are saying there is more to go.

While there is nothing wrong with a falling dollar since it does make us more competitive with foreign markets there is a limit. It's probably inevitable considering our high debt and current account balance but it is going to eat in to the profitablity of doing business in Europe. Most of my business is based on contracted rates for my time that made for good business at a more attractive exchange rate.

The only real danger with this scenario is that central banks are not going to like to see the value of their reserve holdings in dollars fall by a substantial amount and will move to unload them and and reserve in the Euro or some other currency. If this happens and it turns into a minor or major run then we have problems. We are the most indebted nation in the world and if the dollar weakens to a level where we cannot continue to sell debt then look for the recession. This is why the rapid increase in gold price is just a bit worrisome.

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