Saturday, February 17, 2007

The U.S. Dollar

Dollar Weakness Is Not Necessarily Bad

Bill Gross, of Pimco fame, joined the chorus of Warren Buffett and others saying the U.S. dollar is "doomed." Gross made these comments in this weekend's Barron's Roundtable.

Gross repeats the same comments as many others: the twin deficits (federal and trade) will force the country to inflate its way out of the deficits. This is pure hogwash.

The U.S. dollar will go down relative to some currencies due to other countries becoming wealthier. This is a good, not a bad thing. Emerging economies will provide goods and services at competitive prices and the market will reward those countries with a stronger currency.

This is exactly what happened to Japan in the post-World War II era. Japan started off making low-end trinkets and then moved up the value chain, becoming a powerful global economic participant. Its currency appreciated relative to the dollar along the way.

The same will happen to other currencies. China was the prime example in 2006 as it began to manage the appreciation of the yuan.

When you hear all this negative babble that the U.S. currency is doomed, take it with a grain of salt. The dollar weakening because other economies are doing smart things is a good, not a bad thing. History has shown that as long as the U.S. keeps inflation between 2% to 2.5%, then a weaker dollar is manageable.

January 22, 2007

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