Thursday, September 20, 2007

The Dollar Keeps Tumbling

That loud sound you hear is the thud of the declining dollar.
For the first time since Gerald Ford was president, the loonie can buy as much as the greenback. The U.S. dollar's recent decline against the Canadian dollar, the euro, and even the Indian rupee, means Americans will pay more for imports and trips to Paris, Rome, Bangalore and Toronto. It also may drive overseas demand for U.S. goods and help raise profits at U.S. multinational corporations.

The U.S. dollar reached 1-to-1 parity against the Canadian dollar Thursday for the first time since November 1976. That means one Canadian dollar now buys one U.S. dollar, so a bottle of maple syrup could cost an American as much in Toronto as it does in New York.
Do you think that this does not matter, then think again. A weak dollar means eventually interest rates will need to be raised to offset the lower value of the dollar. Without that it will be hard to sell U.S. bonds and finance our debt. This is the result of economic policies rooted in politics instead of public policy. When the economy falls flat --- and it will --- this will be one of the major reasons. The Federal Reserve rate cut this week is beginning to look more like a desperate measure to head off a deeper recession than we are being led to believe. That is just my opinion but I have been right about most of my predictions so far.

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