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No Inflationary Pressure on the Dollar
by Freddy Espinoza
May 3, 2010
The yield curve is steep enough to signal that investors think higher interest rates will appear in the future, but how high? 10-year treasuries (^TNX) are currently yielding 3.68 and the historical rate for these securities is 4.31%. Not so high, the steepness is caused by last year’s low rates. According to the Fed “inflation is subdued,” which makes sense since the unemployment rate has provided enough fear to discourage American consumption, therefore not pushing prices upward. Inflationary pressure has not yet appeared. This will calm inflation in the short term.
As for the long term, many people fear the huge national debt will bring down the dollar creating massive inflation. Fortunately we are not alone! Europe’s countries have also debt problems. Greece has an 115% debt/GDP, Italy has a 117% Debt/GDP, and Italy has a 117% Debt/GDP. According to Bloomberg Japan has a 190% GDP/Ratio. The US dollar Index (^DXY) measures the dollar against a basket of currencies,; according to the index, the euro and the yen are the ones that affect the dollar the most; this index has actually risen over the recession. Continuing a decline in the index from 2005-2007 the dollar rallied in mid-2008 to 2005 highs. Our dollar currently stands at an 81 level compared to the 75 level in 2006; our dollar is stronger than 4 years ago. So where is all the deficit reflecting? Its not since other currencies have debt problems too!
Unemployment rates are also high in other countries with Europe’s unemployment at 10%, Japan at historical highs and U.S. at 9.7% everything seems to move in synchrony, which cancels out the downward dollar pressure, so the dollar should not be affected as much as we think so.
Does than mean China will take over? Emerging economies will continue to develop, but for them to catch up to their GDP growth rate will have to be excessively higher than their population growth rate. They depend on the U.S. economy for many reasons besides national trade (such as trade and financial regulation.)
Unless the most currencies collapse and we return to a gold standard monetary system (extremely unlikely), in the medium term, which is in 1-4 years, the forex movement should move along rising individual currency interest rates. In the long term, that is later than 4 years, we should not notice a big effect on the dollar.
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