Friday, January 02, 2009

The Dollar to Euro exchange rate and why it may matter

I've been studying this ten year graph of the price of a euro in dollars. You can see the price was actually higher in the middle of 2008. That's good, because a sudden rise in the dollar cost of euro's could indicate a serious problem. The Chinese yuan is pegged to the dollar - unless and until they decide that they could benefit their economy more some other way with the money they use now to buy dollar denominated assets to keep the dollar artificially expensive to help their exporters. The Japanese yen isn't pegged, although they do intervene in the market in much the same way as the Chinese.

If speculators were betting against the dollar, the first sign we saw might be the dollar euro exchange rate. Remember all those devaluations during the other little economic crisis? As long as imported goods stay cheap, we have a lid on dollar inflation, since American companies have to compete with importers on price. If other countries give up on lending us money (that is, buying dollar denominated bonds) to keep their imports artificially cheap, one of the first results we may see is inflation of hyperinflation.

1 comment:

L. Venkata Subramaniam said...

I do not think buying dollar denominated bonds is going to stop anytime in the near future. Yes Gold is back in favour with some nations and people, but still for sometime going forward dollar bonds will be popular. No country today wants to sit on a pile of cash. So either they will push internal spending on infrastructure projects or they will buy dollar bonds.