The Currency Game

BBC is reporting that the Canadian dollar (or the loonie) is enjoying a rise in value against the American dollar (USD). At $0.90 per $1 USD, the currency is enjoying strength that it hasn't seen since the 70s. Of course a strong Canadian dollar is great for tourists, but it also has a negative impact on international trade.

By some accounts the US dollar needs to weaken, especially in light of skyrocketing trade deficits. Many economists believe that a weaker USD will help correct some of the trade imbalances with Asia. However, the flip side of this equation is that it will also hurt other economies that depend on exporting goods to the US. Because Canada and much of the world floats its exchange rate, a precipitous fall in the value of the USD will cause foreign goods to be more expensive in the US. In the short term it can have an enormous effect on the amount of goods we buy from those countries.

Further compounding the problem is that many Asian countries manipulate their exchange rates to help offset any weakness or strength in the US dollar. China has recently drawn the ire of the international community for its currency manipulation as well as the threat of sanctions by trading partners.

So while currency traders and economist fret over the falling value of the dollar, what should the average Joe think? Well for starters don't be surprised if the cost of certain goods goes up. But don't expect everything at Wal-Mart to be drastically marked up. As long as China continues to monkey with its monetary policy the cost of goods from much of Asia will remain the same. Likewise, cheaper labor will still represent a major advantage for manufacturers so a cost savings will still exist.

However, the falling dollar will also have an effect on foreign investment in the US, most notably in government bonds. Don't be surprised if interest rates continue to rise over the next few years. This will be necessary to entice other countries to continue buying our debt.

Ultimately this could be the beginning of a correction that many have long called for. As I read through various columns, op/ed piece and newsletters the consensus still remains the same. Even though things need to change, they do not need to do it quickly. In fact the more measured and steady the pace the better off our economy will be. I tend to agree, not simply as an investor or an armchair economist but as an American who doesn't want to see thousands out of work and hundreds of failed businesses. It is usually better to do things in a steady, well thought out manner.