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Dollar Has No Where to go but Down

By: Steve Johnson

5/5/2008 - 18 Comments

On Friday, U.S. Treasury Secretary Henry Paulson, said “We’ve Turned the Corner”, “We're closer to the end of the credit crisis than we are to the beginning”.

Henry Paulson, along with the entire administration, continues to be optimistic about the economy. Last week the GDP number for Europe showed that Europe is definitely struggling, which helped push up the dollar against the euro later in the week.  Paulson said, "Our long-term fundamentals compare favorably with other countries, and that will be reflected in the value of our currency," 

What Paulson is saying is that our economy is in the toilet, but because other nations are also struggling, we are at least holding our own.  Is this what he means by having a strong dollar policy?  The dollar rally last week really has nowhere to go. The dollar is briefly gaining against the euro because they are also struggling, but Europe and Asia do not have a negative saving rate and a declining housing market. 

Their biggest problem is rising food costs, which is due to rising oil cost – which is primarily due to the weak dollar. Therefore, once they realize that the America Federal Reserve monetary policy is behind global rising food costs, they will look for other currencies to protect their wealth – and will push even harder to replace the dollar as the World Reserve Currency uses to buy/sell oil.

The World is Full of Dollars

The problem is that the world is full of dollars, as nearly two-thirds of the dollars in circulation are used outside the US. Last week’s dollar rally was not based on fundamental strength in the US economy. We still have a 9 trillion dollar national debt, 60 billion per month trade deficit, a falling housing market and consumers are swimming in debt up to their eyeballs. 

The coming recession is here to stay; we haven’t turned any corners, as Paulson suggested.  The government is running out of things they can do and Paulson is trying to talk us out of the recession. Talk is cheap; the facts are still in front of us.  Home foreclosures are still climbing. Unemployment is still increasing and the dollar is still declining.

Reference Article: Paulson: We've Turned the Corner

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