Dollar bear

I have been thinking about this for a while and now that Bush is here for "four more years" I think even more strongly that the US dollar is now at a significant risk. I'm not really sure what I'm missing, but I don't really see currently how the total deficit is going to come down. Recently the dollar has fallen to a new low against the Euro and I think that this is just the beginning of a trend. Of course I have no formal knowledge of the complex interactions between currency, debt, interest rates, the stock market, policies and politics to come up with any argument one way or another which cannot be refuted.. In my simplistic view of the world, I like to think of a country as a company and it's currency in terms of it's stock; one can draw surprisingly close parallels between the two.

• The net long term debt of of a company to the net deficit of a country
  
• The revenue to GDP
• The trade surplus to earnings
• The "value" of it's currency to it's market cap or it's stock price.
  

When one looks at a company for valuation, one of the biggest red flags is increasing debt. Investors are usually fine with this if the company is expected in the future to use this debt to grow it's earnings at a pace faster than it's growing it's current debt, for example by building new plants or investing in R&D for new products; I believe this is the current world view of the dollar - that the current deficit will lead to higher returns later.

Since the dollar is a world currency, one of the most obvious ways for Bush to cut the deficit in half is to start printing more dollars. This is the part where the complex interactions come in. Printing more US dollars means the debt can be paid off with the newly printed dollars; however the value of the dollar decreases(company issues more shares, the debt per share decreases but so do the assets revenues and earnings per share). It means that the trousers "Made in China" are suddenly not so cheap at Walmart. Of course that'll also cause that the net imports from China to decrease.. eventually helping cut the deficit even more. But meanwhile inflation in the US has increased and the US consumer is buying less and less. On the other hand as interest rates rise, the debt(US deficit) becomes slightly more attractive since it's paying a higher rate of return(interest) which might start helping the dollar gain back ground. Actually at this point a lot of interactions become "alternate world scenarios".. somewhat like a chess game.

On the politics side of the alternate world, if Bush goes ahead with his private social security accounts, that's again something that'll bring a huge amount of money into mutual funds etc. Of course it'll help the financial companies but more importantly, all this new money into the market will helps boost the market a lot(adding to the net assets of the US). It might then become attractive again for foreign money to buy cheap US dollars, invest in the US market (causing a ripple effect in the market) and cause the market to go even higher. At the same time because of the US dollar buying, the dollar goes higher. All this depends not only on the extent of this privatization but also on the timing, both of which are political issues.

However if he keeps doing what he has been doing.. spending, which in my mind is the more plausible scenario, then there is nothing really to stop the falling dollar.

Recently there's been a lot of talk about rising oil prices. Let's take a step back from that and think in terms of the US dollar. In Nov 2003, 1 US dollar was about 1EURO . Today it's about 0.77 Euro. Oil went from about $28 to $50 during the same time. Whoa!

But wait, if we look at it again in terms of the Euro. It only went up from Euro 28 to Euro 38.5 . Suddenly that doesn't look as bad as the US prices rising, does it now? The Europeans "only" saw a 37% increase vs a 78% for the US, about half the increase the US saw. Are the US economists and financial gurus trying only to "hide away" or "hide from" what's truly out there by talking just about the oil prices on TV?

A lot of these really depends not only on the events themselves but the sequence of events. The directed graph picture in my mind right now has very few paths that lead to a stronger or sustained dollar and many more towards a weaker dollar. In the past few years we have seen the dollar bear come out of hibernation and sniffing for food. The question now is : will it attack those unsuspecting hikers?

PS: I have never really traded currency but it's probably about time. If someone has any recommendations or experiences for online trading sites with not a huge capital minimum, I'd appreciate it. Some of the European ETFs and international equity funds might add some protection so that's something I'll look at. The gold ETF is also something to explore although not really something I would like to do.
PS:I have also enabled anonymous comments so you don't have to register to leave a message.