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Economics: Is the Coast Clear for the Dollar?
New York: April 26, 2004
By John R. Stephenson

The last few weeks have seen something we haven't seen for a while - a rising US dollar. The dollar has looked truly invincible, as it has surged upwards, largely on the back of buoyant economic news out of New York and Washington. Are we likely to see a higher US dollar in the future? I think not.

I believe the basic reason that will cause the dollar to resume its downward trend is an enormous current account deficit (more imports into the US than exports) which stands at a whopping 5% of GDP. If you believe in history as a good precursor to future events, think of the1985-87 time period when the dollar suffered a significant decline - at that time the current account deficit stood at just 3% of GDP. For the dollar to rise, there has to be significant inflows of capital from the private sector. With weak economic growth around the world (absent commodity demand from China) resulting in low demand for US goods and a dollar yet too strong to choke off imports into the US, the stage is set for a lower US dollar in the future.

As well, US debt has now risen to nearly 200% of GDP over the last few months. The last time the debt level was this high was during the great depression when GDP contracted sharply. As well, we have swung from a government surplus in 2000 of $255 billion to a deficit of $421 billion. This is the equivalent of a $676 billion fiscal stimulus being applied to the US economy over the last three years resulting in a strong growth rate of about 4.3% over the last year.

With a ton of debt on the consumer's balance sheet (mortgage foreclosures just hit an all-time high) is there any way that the US dollar can stay aloft? I don't think so. Things are just way too tight. For the US dollar to go higher, there needs to be more buyers of the currency than sellers. But if Americans continue to buy more foreign goods than we sell, then it is unlikely that without central bank intervention there will be any up-tick in demand for US dollars. With an economy that is growing faster than its peers, weak trading partners and crushing consumer and government debt, the way forward is for the US dollar to continue to weaken (mainly against the Asian currencies) rather than strengthen.

In order to shrink the current account deficit, the US economy would either have to slow to a growth rate of 1% or the overseas economies must grow significantly faster than their five-year trend - an unlikely circumstance. Our prediction? Look for the dollar to weaken substantially and gold to rise over the next couple of years.

StephensonFiles is a division of Stephenson & Company Inc. an investment research and asset management firm which publishes research reports and commentary from time to time on securities and trends in the marketplace. The opinions and information contained herein are based upon sources which we believe to be reliable, but Stephenson & Company makes no representation as to their timeliness, accuracy or completeness. Mr. Stephenson writes a regular commentary on the markets and individual securities and the opinions expressed in this commentary are his own. This report is not an offer to sell or a solicitation of an offer to buy any security. Nothing in this article constitutes individual investment, legal or tax advice. Investments involve risk and an investor may incur profits and losses. We, our affiliates, and any officer, director or stockholder or any member of their families may have a position in and may from time to time purchase or sell any securities discussed in our articles. At the time of writing this article, Mr. Stephenson may or may not have had an investment position in the securities mentioned in this article
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