Dollar Update (June 2008 Edition)...

This will be my last update on the US dollar since we leave Prague in a little over two weeks and once I'm back where a dollar is a dollar I won't care so much if it is falling or rising.

Here is the graph of how the dollar has fared compared to the Czech Crown over the past month. It ended the month almost exactly where it started, at about 16.1 crowns to the dollar, although it was higher than that for most of the month. The dollar jumped to abut 16.5 in the first week of May and then the air leaked out of the balloon and the dollar slowly fell. However, the dollar is still above its low mark of about 15.5 crowns experienced in April.

The dollar is tied, in my opinion, to the current credit crunch, the slowing economy and the recent run up of the price of oil. In all three of these areas I think we have reached bottom so the dollar should appreciate by the end of the year. But let's look at these three elements one at a time.

The credit crunch - After being front page news for months amid worries of a collapse of the banking system, things have calmed down considerably recently. Credit crunch news, what there is of it these days, is more likely to be related to the situation in Europe, particularly the UK. The US was ahead of the curve in the discovery of, and recovery from, the credit crunch. The Fed has been dropping rates steadily for months but the general belief is that further rate reductions are unlikely. The housing market is still down and prices are still falling (something that will benefit us immensely when we move back to the States in a couple of weeks) but inventory is stabilizing.

The slowing economy - The widespread belief that the US is in recession is wrong - at least so far. The commonly accepted definition of a recession is two consecutive quarters of negative growth. The last few quarters growth has been very slow, under 1%, but not negative. Therefore, the earliest we could know that the US is in recession would be October (after the quarters of April/May/June and July/August/September). This assumes negative growth for these two quarters and I don't think we will see that. But whether the US slips into recession or not has a lot to do with the third area - oil.

Oil has risen sharply recently, and I had posted previously, here in particular, of my belief that the current situation is a bubble. The price run up is not related in any significant way to supply and demand but more due to the impact of speculators. This is far from sure thing and I even received a chiding email from my father-in-law saying that oil is really worth the higher prices. However, observers in many diverse quarters are calling the rise of oil prices a bubble.

The Financial Times reported yesterday that:

Billionaire investor George Soros is to tell US lawmakers on Tuesday that “a bubble in the making” is under way in oil and other commodities and that commodity indices are not a legitimate asset class for institutional investors.

He is expected to tell a congressional committee that rising oil prices are the result of a number of fundamental changes and factors in the market, but that the relatively recent ability of investment institutions to invest in the futures market through index funds is exaggerating price rises and creating an oil market bubble.

“I find commodity index buying eerily reminiscent of a similar craze for portfolio insurance which led to the stock market crash of 1987,” Mr Soros will tell the Senate commerce committee, according to a draft text seen by the Financial Times.

“In both cases, the institutions are piling in on one side of the market and they have sufficient weight to unbalance it. If the trend were reversed and the institutions as a group headed for the exit as they did in 1987 there would be a crash.”


Here is the graph of historical prices for oil.


The credit crunch in the US seems to have bottomed out, the economy may not even fall into recession, the Fed is probably done with cutting interest rates and the price of oil may be a bubble which could burst very soon (the price has fallen from $135 TO $127 in the past few days). In every area it appears to me that the worst is over, or nearly over, for the dollar. I will predict $90 a barrel oil and a dollar at 18.5 crowns by the end of 2008. We'll see.