The U.S. dollar is sinking. Since March, the index of the dollar’s value versus several other major currencies has dropped over 9%. Against the Euro, a major currency block and trading partner, it is down over 10%. This has both positive and negative implications. However, as the world’s reserve currency, this trend is not good.

First, the major positive, a weaker currency makes our exports more affordable for others to buy. This is a boon for some companies, but how many? The U.S. is not a major exporting nation. Most of our international concerns produce in or near their offshore markets, so the effect is limited. In time, a weaker dollar could encourage more firms to bring back production to the U.S., but that is problematic and would take a long time.

The negatives are numerous. Imports become more expensive and we import a lot. Money leaving our currency eventually raises our interest rates as our money supply contracts. Today this is being offset by the policy actions of our Federal Reserve. This will not always be the case. A declining currency erodes confidence in its ability to store value and can create a vicious cycle of erosion.

Thankfully, our currency is not in free fall yet, but it does bear watching. A strong dollar has many more benefits to our economy than a weak one; just look at countries with weak currencies, Argentina, Lebanon, Zimbabwe, and on and on. Gold increasing in value is another indication of concern. Next week, the Bull will write about more investment implications of a weakening currency, not an immediate concern but a rising one. Stay steady, my friends.

The Lonely Bull