8 Reasons Why the Dollar Will Continue to Fall

November 26th, 2007 | Posted in Economy, Investing

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You may have heard that the U.S. dollar’s value is dropping in the world markets. In fact the dollar has dropped significantly against other currencies. The U.S. Dollar Index has dropped significantly and continues to fall.

The U.S. Dollar Index (USDX) is a measure of the U.S. dollar relative to a majority of its most significant trading partners. Currently this index is calculated by factoring in the exchange rates of six major world currencies: the euro, Japanese Yen, Canadian Dollar, British Pound, Swedish Krona, and Swiss Franc.

So the question is this. Will the U.S. Dollar continue to fall? Or are we at a bottom for the dollar? I believe we have more room to fall.

1. U.S. economic growth is expected to have slowed sharply in the last 3 months of this year according to a Reuter’s Poll. The Federal Reserve pegs 2008 expected growth of 1.8-2.5%.
2. Sub-prime is not over. As more and more companies declare their losses, the credit markets will remain volatile. In addition the credit problems will move to other instruments such as consumer debt.
3. A prolonged housing slump has pushed up turbulence in the credit markets and increased the chance of a recession in the next year.
4. High oil prices will cause increased inflationary pressure.
5. The Fed should continue to decrease the Fed Funds rate by at least a quarter point to avoid a recession.
6. Chinese have indicated they may move from weaker currencies into stronger currencies. This is widely believed to mean a gradual transition from the U.S. dollar to Euros.
7. Some of the larger nations the dollar trade against are doing well economically. Combined with some of the developing nation’s standard of living increasing faster than the U.S.’s, the currency exchange will favor them.
8. The U.S. has been carrying a trade deficit for years. Foreign countries can only buy so much U.S. goods. Eventually their consumption of U.S. goods tapers as do their holdings of U.S. currency. This leads to unfavorable moves in the dollar rates.

My next post will have some ideas of what to do for an eventual Fed interest rate cut and continued dollar decline.