How will dollar behave under current underemployment and stagflation?
Fred Day
Nov. 4, 2006

Interestingly the US Dollar is showing relative strength even when gold is steadily going higher. Some analysts are surprised to see dollar staying steady compared to the economic environment. The dollar will out perform all expectations – although it may not go significantly higher in the intermediate term. Here are the reasons.

There are too many dollar bears. America is world’s largest and most likely only consumer engine. It is not trade balance or balance of payments that matter these days. It is the power of buying and keeping other economies afloat that matters.

In that sense Dollar is the strongest currency. Think about what will happen to Asia, Europe and the rest of the world if America closes it trade door 100%. The world economies will collapse in no time. The trade surplus of China will become trade deficit of huge proportion.

At the same time ECB the European Central Bank and Bank of Japan are planning to raise the rates. The Chinese are under pressure to hike the value of Yuan. This does not help Dollar for now. The global slowdown is led by American economy also. But soon other economies with follow American economy.

America will look at using taxpayers’ money wisely after the November election. No matter, which party wins, the Government will be smaller with more accountability and oversight over corruption. The Government contracts will be awarded to vendors who really deserve it. If and when America becomes wise on spending, the dollar will rise again. The key is too keep the Government small, efficient, be compassionate to those who need help and above all bring transparency and audit trail in awarding Government contracts at local, State and Federal level. That will reduce budget deficit, lower long-term rates and strengthen US Dollar.

How will dollar behave under current underemployment and stagflation?
Fred Day
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