Strong Dollar?

I know that a weaker dollar assists exports (and that John Snow has been talking down the dollar), and I know that recent presidents have supported a strong dollar policy. Now, economic gurus, what are the advantages of a stronger dollar?

thus contributes to disinflation.

Also, say (for example) that China pegs the renminbi (people's currency) at 8 Yuan to the dollar (they do) and so the Chinese currency is undervalued (it is) resulting in a Chinese export surplus to the US (and does it ever). How, then, do the Chinese keep their currency undervalued? By buying dollars, keeping the demand for dollars (in terms of renminbi) and hence the rate of dollars per Yuan higher than it would be otherwise. The dollars are "neutralized," i.e. held in vaults for the foreseeable future.

In effect, the Chinese are trading real goods and services for paper or electronic dollars. And paper dollars are VERY cheap to produce. Electronic dollars are even cheapter. From one point of view, this is an enormous bargain for the USA.

Of course, the Chinese print Yuan to exchange for the dollars. By printing Yuan and putting them into the hands of potential importers of Chinese exports, the Chinese government dilutes the purchasing power of renminbi in the hands of Chinese people. This is an implicit tax, and the spending of the money to keep the dollar high is an implicit subsidy to Chinese exports. If this were done openly it would violate WTC rules, but done this way it is legal and perhaps unnoticed.

benefits US financial markets and consumers. Consumers get the benefit of cheap imports. The financial markets need a strong dollar so that foreigners don't dump their dollar-denominated assets. If the dollar weakens, foreigners will lose money on the exchange value of their US assets, so they will sell. Foreigners currently own a huge share of US financial assets (e.g., over 40% of US Treasury debt outstanding). If the sell en masse, the stock market will go down and bond yields (interest rates) will go up (bond prices and yields are inversely related). Rising interest rates would put the kabosh on the fledgling economic "recovery."

And investment.

A weak dollar is a temporary fix for exports. Most internationals already have hedges for currency values, and long term contracts get screwed up with constant fluctuations. If we don't really have much to export anyway, a weak dollar won't help us sell what we don't have.

A stronger dollar hopefully invites investment, which is what we need at the moment. It also cheapens the imports we are addicted to. And, it reduces the temptation to dump dollars, cheapening them even more.

Ultimately, you don't want either a strong or weak dollar if things are running well. Currencies should find a natural parity. Fat chance of that, though.

Which leads me to my personal rant that the whole question of currency values should be moot. Europe's smartest move since Rome fell was to get a common currency. They're saving billions in back office transaction costs and trading losses that way. If we ever get to the point of a worldwide currency, we'll be able to properly assess costs and comparative advantage, and not have problems like Argentina and China pegging their currencies to the dollar and waiting for the fall over the cliff.

Fat chance of that happening, either.

It makes my trip to England and France next week much cheaper than
it was when I found out I was going back in June.

1.09 US Dollar = 1.00 Euro (today)
1.18 US Dollar = 1.00 Euro (06/01/03)

That's about an 8% difference since June. Not as good as the
$0.97 per Euro last year, but definitely better than when it was
teetering around $1.20. I should'a bought Euros when they were
$0.87!

The Pound was $1.64 in June, now it's $1.57; should'a bout THEM
when they were $1.45!

Bigby

in order to spike their own exports and to undercut US manufacturing. They are violating numerous parts of the WTO agreements, far beyond their currency games. We need to carry a big stick-give them six months to correct their behavior and apply tariffs if they don't.

This is the offichal party line, and it isn't true. China and Japan are violating Nafta no more than the US. But even so, these violations are hardly causing any problems for the US. The resone why we are losing job so quickly, is becase Nafta is working as advertized. Just more scape goats.

A strong currency is inseperable from a strong nation. This bit of drivel doesn't say much perhaps. Sorry.

A strong currency has two outstanding characteristics. It makes foreigners want to invest in your country. It makes it easy for your citizens and companies to buy foreign assets.

One of the oldest economic laws states that 'good money forces out the bad'. Meaning people want to keep and hold the real pure gold coin and spend the one that has been shaved or alloyed. In modern terms, since money is no longer gold, it means people will want to hold the strongest currency or assets deominated in said currency.

The store of value part of money is only part of the story however. It is the relative values of currencies which effect trade. The strong dollar makes our products expensive, and foreign goods cheap.

In the modern world of floating exchange rates and pure fiat currencies, ie. ones with no backing of a metal or other standards, the forces which affect currencies are complex if not totally beyond analysis.

The strong dollar probably is due mostly to the fact that we run the game that is the world economy. We make the rules and run house, Wall St.

The amount of dollars in existence has doubled since 1995. 1776 to 1995, 219 years 100%. 1995 to 2003, 8 years, matched the first 219. This astoinding fact is made more astounding when one cosiders that this gigantic increase in supply has not driven its value down.

Obviously every single thing you ever learned about markets is crap. Dollars created from nothing at a rate that is around 10% annualized has maintained and even increased its value.

Other nations, addicted to exporting to us, are foolish enough to want weak currencies.

An additonal strangeness involves the fact that currencies are strong or weak only in relation to each other. At the end of the day what nations finances are any better than ours? (Well ours are going really bad really fast, but I'm speaking in general terms over the longer term)

The dollar has had some trouble over the last 20 months or so, losing about 20% of it value compared to a basket of others. Still, that isn't a disaster, and in fact it is 8% or so higher now than it was a couple of months ago. THe dollar will probably remain strong, and to put it crudely, because we have the biggest guns.

(actually, it was more like the greenback got weaker) and the tourist trade dropped like a lead balloon.