Headline: "Dollar Crumbles to Record Low Vs Euro". Bad or good? 13

[markleblanc]

I keep seeing stories like "Dollar Crumbles to Record Low Vs Euro".

http://news.yahoo.com/news?tmpl=story&u=/nm/20041202/bs_nm/markets_forex_dc_24

Is this good, bad, or irrelevant for engineers. Manufacturers say its a good thing. I hope they build more plants and hire more engineers. It sure doesn't sound like a good thing though. Thoughts?

Mark

 

[corus]

For the US it's a good thing if you are exporting and selling your goods abroad. In the UK I don't know what the US exports, other than Coca Cola, so the effect might be minimal. It also increases the prices of goods arriving in the US from abroad so that should make them less competitive to US goods sold in the US and hence encourage business. Of course currencies that are linked to the dollar, such as that in China will also benefit in exporting their goods and hence encourage their industries, not that they needed much. Holidays in the US will also be cheaper for foreigners, and also in China.

corus

 

[markleblanc]

It does seem like it is "crumbling" against the wrong countries though. I have a Nokia phone, other than that, I can't think of another European thing that I own. I own tons of Asian stuff. Sony stuff all over the house and a Toyota. The US dollar is supposedly "crumbling" so that the massive US trade deficit will go down, but it is falling against countries that we don't buy or sell all that much from or to. I have never heard of a plant closing down and moving to Europe for cheap labor. This is even weirder since the Chinese currency is pegged to the dollar. So now the "crumbling" dollar is making China's currency crumble too. Maybe the Europeans will now start buying so much Asian stuff that Asian prices go up and the US buys less. I also have a hard time accepting that "Dollar Crumbles to Record Low Vs Euro" is a good thing for the US. Maybe it's because I'm an engineer not an economist. I just can't get my self to cheer, yeah, dollar, crumble some more. It just sounds wrong.

Mark

 

[PSE]

As corus pointed out, if you are a US exporter, your goods will now be more competitive in the european marketplace. If you are a consumer in the US, european goods are more expensive as your buying power relative to european products has decreased. This makes domestic equivalent products (what we have left) more attractive to the US consumer as well. Does not do anything versus asian currency.

 

[arunmrao]

Defence equipment and related goods will become cheaper for the Asian countries to buy. But it is a big hit to China and India who have large exposures to US $.

It is no more sensible for me to sell castings to US due to falling dollars. It is atractive to sell in domestic market.

 

[finman]

I'm writing this post in the UK and the dollar rate is good for us, in fact it has tipped the balance in favour of American suppliers for a number of machines we need to purchase.

So it's good for you guys, our domestic market will loose out on the order.

PS It's also good for Brits taking a holiday in the U.S.

 

[davefitz]

The latest reports are that there is a record amount of "insider trading" of stocks by upper management of US financial companies. I guess they know there is a big "correction" on the way and are rolling over their stock options into China RMB and Euros.

In some ways its a good thing the USD is dropping in value- it will force a reduction in profligate consumption of finite resources, but also implies that the relative economic importance of other regions will increase - and their political and military importance will incrase proportionately. It will be interesting to see what methods are used to slow the shift- it sia fair bet that some methods will be "sub rosa".

 

[GregLocock]

A falling exchange rate should reduce the attractiveness of offshoring, and encourage domestic manufacturing.

In my opinion it needs to drop by about 15% more - if it does I suspect the Chinese will alter their fixed exchange rate.

The overnight Federal interest rate rise may be an attempt to slow the fall.

Many large companies hedge a significant proportion of their imports and exports, so the effect of a shift in the exchange rate is delayed. Sadly many companies don't understand hedging and get their fingers burnt - it has destroyed at least three large Australian companies I can think of.


Cheers

Greg Locock

 

[Laplacian]

The EURO is too new to have much of a track record against; no opinion there.

The latest strike against US business now is the long term future of high natural gas prices. LNG import terminals will be too little, too late to offset the coming price increases. This will cause energy and feedstock prices to go up; further reducing US competitiveness.

Our company has idled a lot of production due to an ethylene shortage. The main source of ethylene is natural gas. I somehow doubt there will be more chemical plants (or significant capacity increases) built in the US to address the ethylene shortage. This means even more manufacturing goes offshore to find cheaper feedstocks and energy.

The environmental movement in the US has really put the pressure on US business to move manufacturing overseas to remain competitive. It also makes it harder to open permit new manufacturing facilities.

 

[BigH]

The current situation would be great if you had a couple of million dollars back when the Euro was at 87 cents - and could buy them. Now, you'd get a lot more dollars! As far as Corus' comments on US only exporting Coke, most coke is made in the countries of consumption so we aren't really exporting it. However, for Boeing, Caterpillar and the music industry, I would say that the low dollar is a big boost (better airlines buy Boeing than that . . Airbus). On the down side, it is sad that American cannot produce a single TV or consumer electronic equipment. But, even Japan is shipping off the manufacturing to China, Malaysia, Indonesia because the stuff is too expensive to make in Japan.

 

[HarrisDE]

There are other issues at stake here, issues closer to the American consumer's heart...

1) Our economy is balanced between massive investment coming in and a massive trade deficit. Money flowing into and out of the country must be balanced to zero so if one half fails, then so does the other.

2) This is related to exchange rates because your currency is a measure of the attractivness of your country as an investment. When we are talking investments we are looking at rate-of-return or interest rates. Deficits make a country unattractive and depress currency. Stability (which America usually has) makes it more attractive. Further, higher interest rates will bring foreign investors chasing higher returns. The US has had money pouring in because it was seen as the most stable, productive country in the world. People (countries) are willing to tolerate a hit on interest rates for this stability. They were financing our debt.

As the US deficit grew last year it called into focus the relative stability of the American market vs. Europe's. I believe Europe also had a better interest rate. As foreign investment in the US dried up, the demand for and consequently value of the dollar decreased. This leads to an increase in the cost of imports. There is then a necessary decrease in the trade imbalance.

The sticking point for consumers is related to interest rates. There is now the possibility of a currency crash. Other countries hold huge dollar assets that are declining in value. To cut their losses, they could try to sell. The value of the currency could spiral down. In order to attract more investment to finance our debt, we would have to increase the our interest rates. While other folks get better returns, it has the effect of damping our economy. This decreases the now rampant US consumerism and again corrects the trade deficit. It hurts normal people because the current housing boom is largely supported by low interest rates. Personal credit card debt is made more bearable by low interest rates.

So, it's too early for "good" or "bad". The current situation has been a long time coming and has its roots in American culture as well as recent events. Decreased imports means more domestic production but higher interest rates damp the economy. If we have luck, things will stay in relative balance and change slowly. If we're really unlucky, the world economy decends into chaos as our currency undergoes a third-world stlye crash.

Lucky me, I'm paid in Euros but run my accounts in the USA. Let the good times roll.

Grüß - Scott

 

[QCE]

Unfair,

All of the engineers were sitting around here making some economic stuff up and complaining and then Harris had to come along and say something intelligent. Harris you sound suspiciously like you know what you are talking about. Are you really an engineer or are you one of those commerce guys trying to sneak onto the engineering website.

 

[HarrisDE]

Thanks, I'll take that as a compliment. I spent a 7 years in night classes working on that stuff.

I'm a mechanical engineer but I finished a Finance-MBA a couple of years ago. The darndest thing - just like my bachelors, it just created more questions than answers.

I have the chance to put money where my mouth is. I'm moving to Detroit from Germany next month. Will I buy a house on low interest rates or will I wait for rates to climb and values to crash? It's easy to talk about the theory but when it's your life and your money, that's something else entirely.

Grüß - Scott

 

[DrillerNic]

Don't forget that the dollar is falling against a whole basket of currencies- the change in the Dollar- Euro exchange rate isn't the Euro being strong, but the dollar being weak, so all those comments upthtread about stuff made in Japan and Korea...they'll all become more expensive in the US over the next few months, as well as BMWs, Jaguars etc.

the scary time will be if the dollar hits a benchmark figure like $2 = £1, because at that point there are lots of automatic sell options out there...

 

[GregLocock]

If anybody has their options priced at a round number like that then they are ripe for the plucking. Never set a target at a round number.

Cheers

Greg Locock

 

[arunmrao]

Drillernic,
todays rate is 1.35$=1Euro!. Fewer American can visit Europe on a holiday now but lot many from Europe can travel to US. Who gains??

 

[controlnovice]

Marc.... You ever work for ALPC?

 

[scalleke]

Is the value of a currency an indication of how attractive the economy of a country is? In general Yes, but in this case NO.

The fall of the US dollar is not a consequence of a poor US economy it is a simple consequence of thwe fact that the US government is in fact borrowing way too much money. To cover the budget deficits they have to give out bonds to mainly international investors and there is so much government paper on the international market that no one wants to continue to subscribe to these loans that the US government is taking out.

All this again is good for the US economy. US steelmakers are amongst the most inneficient in the world as they have not invested over the past decades. Now they can sell some of their steel due to the fact that their prices on the international market have dropped by well over 50% against some currencies.

Canadian lumber through combined currency fluctuations and restrictive tarrifs has increased in price by about 50%.

And the price of an Airbus jet has just gone up by about 55% for the US airlines, great at a time when Airbus is getting ready to beat Boeing plane deliveries for a third consecutive year.

Look at what happened under Reagan. The US is using its military to shape the world to suit its economy. The ensuing monetary losses are being used to protect and boost the US economy through a drop in the currency value and a combination of tax relief for the wealthy, protection barriers for the US econmomy and military spending.

All this means that the US economy is getting ready for a new boost. At first internally and afterwards more globally. The US will remain a great place to work for an engineer.

Is all of this fair, NO. Are the US leaders doing what is right for their country . . . YES!!! (from an economical standpoint)

And yes the US economy will become so strong that the dollar will be attractive again and it's value will rise. When, as soon as there is another president who will reign in spending.

Best regards,

scalleke

 

[25362]

What would American engineers living abroad and getting their pensions in dollars have to say ?

 

[GregLocock]

I don't know. What would American engineers living in the USA getting a pension from abroad say?



Cheers

Greg Locock