The Falling Dollar - April edition...

It's another first week of the month, and no it's not April Fool's Day - I purposely didn't post about the dollar on the first. In a nutshell, over the last month we have had more of the same from the dollar - weakening. You can see from the graph that the trend is still lower. There was a brief recover from 16.0 to 16.5 in the middle of the month, but that was just the dollar mocking us before it turned and continued its slide. As I write this the dollar is below 16 again, standing at 15.94. When we arrived in Prague in August of 2006 we could get about 23 Czech crowns (koruni) for one dollar, now we can only get around 16, a 30% drop.

Today's Prague Daily Monitor reports that the Czech government is going to get proactive in moderating the crown's strength. While the dollar has fallen tremendously to the crown, the crown has also grown stronger against the Euro, but at a slower pace.

Measures against strong crown to be established in a week
prepared by Prague Daily Monitor editorial staff / published 4 April 2008
An agreement concerning the excessive strengthening of the Czech currency being put together by Ministry of Finance and Czech National Bank should be ready in a week. E15 informs that the aim of the agreement is to freeze the flow of foreign currency into the Czech economy.

We'll see how much this helps - and how quickly.

A bet that the dollar will go up...

This morning I made a bet with a guy here at work that the US dollar would go up - reaching 19.00 crowns to the dollar by 01 March and 20.00 crwons to the dollar by 01 June. Of course, then the Fed went and cut the key rate that banks charge each other overnight by 75 points, from 4.25% to 3.5%. This has weakened the dollar even more and it currently sits at about 18.00, down from about 18.25 before the announcement. However, I stand by my analysis from yesterday and believe that the dollar will be "saved" by a worldwide (and possibly deep) recession.

Yesterday I mentioned the difference between the "old conventioanl wisdom" - that the rest of the world is tied at the hip to the US economy - and the "new conventional wisdom" that others, like the EU, had disengaged themselves from the US sufficiently that a recession in the US would not doom them.

Here is the EU in all of its "new conventional wisdom" glory. I call this an example of whistling past the graveyard. From the Associated Press:

The EU's economy chief on Tuesday blamed the United States' huge trade deficit for plunging shares on world stock exchanges, saying Europe was in a very different state and could weather the storm despite slowing growth.

"It's obvious that we are living in an uncertain period," he told reporters after EU finance ministers met in Brussels. Fears of a U.S. recession -- not a larger global slowdown -- were behind falling equity markets, he said, stressing that Europe was not facing similar problems.

I hope I don't lose this bet - it's for a beer!

Has the US Dollar bottomed out?...

I know, I know...I said that I would report on the US dollar once a month, sometime during the first week of each month. However, things seem to be changing quickly so I thought I'd better give my two cents worth. First, a disclaimer...In case you didn't know, and most of you should, I am no economist. I took a class of Macro as part of my MBA program, and I didn't like it. And I make no claim to any particular expertise in the subject.

As I write this (Monday, 21 JAN at 4:30 PM Prague time) European markets are down big time - about 5.6%. That would be equivalent to a drop in the Dow today of 780 points. Pretty serious stuff. It is likely that the Dow will have another down day, but I don't think it will be down anywhere close to 5%.

It appears that Europe is catching the sub-prime flu that the US has been suffering from for the past few months. One reason that the dollar has been hit so hard is that fear of recession in the US has caused the Fed to drop interest rates to spur activity. It also has the benefit of making variable mortgages a lit more affordable for those who got them and watched as the rates jumped up over the last year or two.

Kathy and I had a variable rate home equity loan on our house back in Minnesota. It was a sizable loan (we did a LOT of work on the house) and the monthly payment had started going up regularly - and we felt it. Fortunately, the home equity loan was paid off when we sold our house almost a year ago. But others were not as fortunate, and unexpectedly higher payments has both raised foreclosures and bankruptcies and left less money to spend for those who haven't actually lose their homes.

In Europe, on the other hand, inflation has been a problem - in the Czech Republic inflation was over 5% in 2007 - so the central banks have been raising rates to dampen demand to keep inflation in line. While a slow down, or full fledged recession, is a distinct possibility in the US, it seemed less so in Europe and elsewhere. The old conventional wisdom was that as the US economy went so went the rest of the world. The new conventional wisdom is that the influence of the US economy is less pronounced than before and that it won't drag others with it.

In my opinion, the new conventional wisdom is wrong and a worldwide recession is possible, even likely since a recession is likely in the US. Europe has a housing bubble similar to what existed in the US and with the big drop in the markets here today we may be seeing the initial leak in the bubble.

So, what will happen to the dollar? It has trended down significantly to the Czech koruna recently. It spiked upward to about 18.40 from a low of 17.65 in December before falling back, and is back up to about 18.15 now. My prediction is that the dollar will trend upwards for the foreseeable future. European central banks will have to revisit rate increases and may even have to cut rates if a recession is perceived to be on the horizon. Interest rates should be heading down on both sides of the Atlantic so the dollar shouldn't get worse.

The price of oil has also dropped dramatically in the past week, from a high at $100 per barrel down to $88 today. Expect that price to continue dropping as the spectre of a recession, with lower demand, looms.

A world wide recession is a steep price to pay for a stronger dollar compared to the koruna. My rent and groceries may well be a bit cheaper but jobs will be harder to find as demand drops and the layoffs start.

I hope I'm wrong about the recession, but I feel strongly that the dollar will get stronger versus the Euro and other European currencies during the rest of 2008. I will report again as usual during the first week of February.

The falling dollar (Help!!)...

The US dollar continues to fall against other currencies, to the point where it takes more than one US dollar to buy one Canadian dollar. Since I can remember the Canadian dollar has always been worth about $.75.

For those of you in the US, the falling dollar is likely fairly invisible to you. An exception is if you take a trip somewhere outside of the US. If you go to London you will find that it takes $2 to buy a single British pound, making an already expensive city horrendously expensive for Americans.

You may also notice that the price of some items made overseas is increasing. Take a hypothetical widget that is made by a German company that was 10 Euros a year ago. At an exchange rate of .8 Euro to a dollar, the price when converted to US dollars is $12.50. Today that same 10 Euro price, using the current exchange rate of .705 Euro to a dollar, is $14.18. Nothing has changed except the exchange rate, but the cost to an American for the same item is now over 13% higher than last year.

Conversely, there is a pretty significant benefit from the falling dollar for US companies. Since the same amount of Euros buys more dollars than last year, US goods and services are cheaper for foreigners to buy. This allows US manufacturing to continue to do well, keeping unemployment low. Also, there will be a flood of European tourists visiting places like Disney World and the Mall of America.

For American expats the negative impact can be pretty severe. I am paid in US dollars so when the dollar falls it basically translates into a salary cut. There is no change for things that we buy in the US. For example, I buy term life insurance from an American company and pay (obviously) in US dollars, so the falling dollar does not effect my payment. However, the lease for my house here in Prague is in Euros, 1,500 Euros per month, to be exact. When we moved here last year that 1,500 Euros translated into $1,875. Because of the continuing slide of the dollar that same 1,500 Euros now costs me $2,128. The graph in this post shows the fall of the dollar just since last October.

The fall of the dollar in relation to the Czech koruna (crown) is nearly identical to the Euro. So every time we go to the grocery store, or out to dinner or to the movies we are paying significantly more than a year ago. One interesting note - when I lived in Saudi Arabia I was insulated from currency fluctuations since the Saudi Riyal is fixed to the dollar at 3.75 Riyal per dollar (and still is as far as I know).

Working for a cash-strapped non-profit doesn't help since there is no money in the budget to pay us more to make up the difference.

On the flip side of the coin, a stronger dollar is like getting a pay raise since local goods and services take fewer dollars to buy. Unfortunately, no one is talking about the dollar getting stronger any time soon, and it would have to get much stronger before it back to where it was when we moved here.

Anyway, I just wanted to vent about how it sucks to be me right now.