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The US Dollar : To Decline or not to decline?
New York: June 29, 2004
By John R. Stephenson

With the possibility of higher interest rates in the very near future, it may seem like a strange time to be debating the outlook for the US dollar, however, every day the debate rages on within the financial markets. The case for a stronger dollar centers on the demonstrable strength of the US economy, which seems to be showing ever increasing economic strength. On the other hand, the huge current account deficit, coupled with a staggering government deficit that is lurching out of control, has many pundits worried.

The worry about a weaker US dollar doesn't seem to be confined to financial traders alone. Even the chairman of the Federal Reserve, Alan Greenspan, recently (May 6th) said "At some point…international investors…faced with a concentration of Dollar assets…will seek diversification, irrespective of the…returns on Dollar assets. This, in our view, is the Fed's way of letting us know that they anticipate a drop in the dollar. Adding to the concern about potential weakness of the US dollar, is the recent Current Account Deficit numbers which were released June 18th and came in at $144.9 billion which brought the four quarter total to $537 billion. Even the Financial Times of London was quoted as saying that "There would be no fairytale ending for the greenback."

The dollar has been buoyed a little of late because of the massive intervention in the currency markets by Asian central banks which have bought over $300 billion of US dollars during the last four quarters. One possible spin that you could argue is that this massive intervention is not in fact the mere loaning of foreign money to pay for US consumption, but rather, the foreign central banks are propping up the dollar and depressing interest rates to encourage US consumers to continue to buy their goods (imports for foreign nations).

But would a falling dollar be all that bad for the US economy? In our view, it would not. For starters, there is excess capacity in the US economy and a falling dollar would make domestically manufactured goods more attractive when compared to imports which would lead to an increase in demand for domestic goods. Stronger domestic demand for goods and services would increase tax revenues (helping the budget deficit somewhat) and domestic investment is likely to increase as well. Of course, a weaker dollar would not help the case of the Asian suppliers who are overly reliant on exports to the US and Western Europe for their growth.

Not only is a decline in the US dollar likely, it is probably a good thing and could signal the next leg of the current economic expansion. If the dollar falls, that will be good for a whole series of gold companies and base metal producers who price their goods in US dollars.

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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