The U.S. dollar was on a slippery slope again last week. Some economic data coupled with positive economic news from the euro zone increased investors’ appetite for risk and high-yielding currencies like the euro. Comments from Fed Chairman Ben Bernanke and the ECB’s president Jean-Claude Trichet indicated the road to recovery will be bumpy, signaling to the markets that interest rates would remain low for some time yet.
While this has its drawbacks, I’m of the opinion that a weak dollar will expedite the recovery, and here’s why: Many regions of the U.S.–specifically, those that engage in agricultural and energy production, and manufacturing–actually benefit from a weaker dollar.
You see, a weaker dollar will likely cause many multinational companies, such as European and Japanese automakers, to continue to outsource their manufacturing to the U.S. What’s more, since the U.S. remains one of the most influential consumer markets in the world, we also attract business from companies that produce everything from beer and household goods to pharmaceuticals. In other words, as the dollar decays, it will spark a foreign buying spree and outsourcing to the U.S. This will create jobs on the home-front since 30 of our 50 states are pro-business and offer generous incentives to foreign companies that set up shop on our turf.
It’s only a matter of time before this trend starts to unfold. Especially when you add in the fact that the U.S. federal budget deficit is getting bigger by the day and putting even more pressure on the dollar.
The fiscal 2009 deficit is now forecasted to come in just under $1.6 trillion, which is below the White House’s previous forecast of $1.9 trillion thanks to the repayment of TARP funds by some major financial farms. However, a senior White House official said that the current administration would raise its 10-year budget deficit projection to approximately $9 trillion from $7 trillion this week. The problem is that tax receipts alone won’t be enough to close the deficit gap, so the federal government will have to borrow trillions of dollars in the upcoming years. This makes the likelihood of the U.S. dollar rallying under the weight of additional debt minuscule, so a steady erosion of our currency looks increasingly likely.