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The Fall and Rise of the American Dollar

Let's Review My PortfolioAmerican novelist and wit Tom Robbins once said, “Disbelief in magic can force a poor soul into believing in government and business.”

One can only wonder what he would have thought about a world that has lost faith in both.

This mass cynicism and open distrust of powerful political and economic institutions has helped to create a vacuum of confidence and direction – with serious social and financial ramifications. For example, rather than renewed stability and confidence, the billions of dollars pumped into the ailing economy by the U.S. Government and others have simply served to highlight the gaping holes in our financial system.

And, the talk now is of imminent deflation. The consequences of deflation would be even more appalling – even giants like China, currently the only major economy still bucking the downward trend, would not be able to resist for long.

But, here’s the trillion-dollar question: Is it really inevitable?

More and more commentators around the world have identified deflation as the one crisis we simply cannot afford. Ironically, however, it could be this very obsession with the nightmare scenario that is driving it forward.

There exists a small, but increasingly, vocal number of ‘less pessimistic’ commentators who argue that while the worst is still to come it needn’t be quite so devastating. Instead of acceptance, apathy, and paranoia they promote action, investment, and stimulation. They point to past economic downturns as examples of how intelligent opportunism can make a difference. For them a little support for the government’s massive stimulus packages today could go a long way to securing a stronger and more profitable future for us all tomorrow.  

The phrase ‘green shoots of recovery’ may not be on their lips quite yet, but nor are words such as inevitable, complacency, and crash.   

If they are right then we are living through the final death throes of a particularly unpleasant economic crisis and on the verge of seeing the creation of new and exciting investment opportunities – beginning with the phoenix – like the rise of the beleaguered American dollar.

Interestingly though, a quick return to form for the U.S. dollar could be a mixed blessing – in the short term at least. On the one hand, a stronger dollar allows many Americans to travel abroad at a more reasonable expense – a trend that would ultimately reverse if the dollar were to weaken. On the other hand, a poor performing dollar sees greater investments in foreign stocks and benefits companies operating in the U.S. and other countries that enjoy higher profits as they convert from other currencies into a weaker dollar.

Speaking in December 2008, Stephen Jen, global head of currency research at Morgan Stanley said that he expected to see the dollar continue to decline well into the second half of 2009.

Despite the differences between observers, there is a growing sense that what is unfolding will be something quite unlike anything before. For the cautiously optimistic it may be the rebirth of a sleeker, sharper economy, while for others, we may be entering an irreversible period of decline that will see the U.S. superseded as the world’s number one economic force.

It may all be a question of faith after all.

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