By all definitions the US Dollar should be depreciating in value but against all odds it is not. Why? First the argument about a devaluating dollar: Over the past 2 years the dollar has gone down dramatically due to a dramatic rise in commodities such as Petroleum. The US imports approximately 60 to 70 percent of the domestically used oil and pays premium prices to do so. Since this is inflationary it causes the Dollar to depreciate which causes imports to go up, hence an inflationary cycle commences. One benefit from a weak dollar is an increase in US exports at lower prices. Therefore, our trading partners become angry and start to talk about replacing the US Dollar with an alternate exchange currency. Fortunately this will not happen. However this has caused some to buy Gold as a hedge against deflation.
This is disingenuous as nations like China and Japan control their currency to keep their exports at a low price. So why is the Dollar going up in value? The primary reason is the demise of the Euro Zone countries as the costs of socialism have caught up with them. There is a definite risk that the Euro can fail if any of the Euro Zone nations default. Germany is threatening to go back to the Deutsche Mark which would be the death knell. However, if Petroleum goes over $100 a barrel the entire scenario changes and inflation becomes our major threat. Watch the commodities and the Euro for a gauge into the future view.
By John Leydsman
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