Feds claim dollar will rise in 2011

(AP Photo/Kin Cheung, file)

Never mind the lackluster economy, the huge trade deficit or the government’s piles of debt: The U.S. dollar is still expected to outperform most of the world’s major currencies next year.

“By all rights, the dollar should be declining in value, but it’s not,” says Eswar Prasad, economics professor at Cornell University. “For the dollar to decline in value, you must have currencies on the other side that will” rise.

Bad as things are in the United States, they look worse in Europe and Japan, making the yen, the euro and the British pound riskier bets in 2011. A notable exception is the Chinese yuan, which is likely to rise next year as Beijing fights inflation.

“The dollar remains the ultimate safe haven,” Prasad said.

A stronger dollar would make vacations to Europe a better bargain for U.S. tourists and reduce the cost of imports. But it would also make U.S. products more expensive in foreign markets, dulling businesses’ competitive edge.

The U.S. dollar fell against the euro, pound and yen on Friday during thin year-end trading. The euro rose to $1.3367 late Friday in New York, from $1.3286 Thursday. The British pound rose to $1.5590 from $1.5415 while the dollar fell to 81.21 Japanese yen from 81.52 yen.

For the year, the euro fell 8.3 percent against the dollar and the pound fell 2.5 percent against the dollar. But the dollar was down 12.2 percent against the yen.

Currency analysts at Wells Fargo Bank predict that over the next 12 months, the dollar will rise 7 percent against the yen, more than 4 percent against the euro and 1 percent against the pound.

The thinking: The U.S. economy will gain strength throughout 2011, outpacing Europe and Japan and encouraging U.S. businesses and consumers to borrow more. The demand for loans will push up U.S. interest rates, luring investors to the dollar in search of higher returns.

Europe looks perilous by contrast. In 2010, Greece and Ireland required emergency bailouts from other European countries and the International Monetary Fund. The terms of the bailouts forced them to slash government spending, triggering street protests. Now analysts fear that debt-ridden Spain and Portugal will be next.

“The major issues in Europe haven’t gone away,” says Mark McCormick, currency strategist at Brown Brothers Harriman. “Certain countries are insolvent. Others have fiscal issues they have to deal with.” Spain’s troubles, in particular, could strain Europe’s bailout fund and might even threaten the future of the euro as the continent’s common currency if European countries refused to put up more cash.

The Japanese yen rose sharply in 2010, partly because investors saw it as a safe haven from the troubles in Europe. But analysts suspect the yen’s strength against the dollar will be sapped in 2011 by a weak Japanese economy and huge government debts. Japanese policymakers may also seek to push down the yen to give their exporters a price advantage.

China is facing different pressures. The Chinese economy has roared back from the Great Recession with such speed that it’s set off inflation. Now, China is raising interest rates to cool growth. Chinese officials will have an incentive to let the country’s currency, the yuan, rise against the dollar and other currencies to help tame inflation by pushing down the price of imports.

That could improve relations between Beijing and Washington, where politicians accuse China of keeping its currency artificially low. That has made Chinese exports cheaper in the U.S, and U.S. exports more expensive in China.

U.S. politicians were under pressure to ramp up the rhetoric against China in the election year 2010, especially with U.S. unemployment near 10 percent. In September, the House passed legislation that would allow the United States to impose tariffs on China if it didn’t allow its currency to appreciate. The Senate never acted on the legislation.

Mark Zandi, chief economist at Moody’s Analytics, says the tension should ease in 2011 as the U.S. economy improves, the yuan rises and politicians are no longer stumping for votes.

“Allowing a stronger currency would be consistent with the objective of cooling off inflationary pressure,” says Wells Fargo currency strategist Vassili Serebriakov. “China will not want to be seen as responding to political pressure.”

Copyright © 2011 The Associated Press

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6 Responses to "Feds claim dollar will rise in 2011"

  1. Almandine  January 2, 2011 at 2:56 pm

    “For the dollar to decline in value, you must have currencies on the other side that will” rise. So says the econ prof at Cornell, which by now should be known as off limits to anyone wanting to understand monetary policy and the economy.

    Think of that as you pump $4 per gallon gas, the price of which has nothing to do with robust demand or constrained supplies, only more and more worthless dollars caused by quantitative easing and other Fed boondoggles.

    Ditto for all the other stuff you want to buy which has increased in price for no apparent reason.

  2. Keith  January 3, 2011 at 5:16 pm

    Almandine, there very much IS an “apparent reason” for the rising cost of gasoline.

    Right now, that increase is being driven by two major factors. One factor is the ever-increasing demand for petroleum products (most notably gasoline) to fuel the world’s emerging economies like China, Brazil and India. It’s simple supply and demand.

    The other factor is the shrinking worth of the US Dollar as compared to other world currencies. The US consumes upwards of 14-18 million barrels of oil PER DAY. Some 9-10 million barrels of that daily consumption is provided domestically. However, the shortfall between what we use and what we produce has to come from foreign sources…and that “foreign oil” must all be paid for by increasingly devalued US dollars.

    Now, contrary to popular belief, the largest source of the USA’s “foreign oil” comes NOT from the Middle East, but from our friendly neighbor to the north in Canada. In fact, right now, Canada is providing some 2-3 million barrels of oil per day to the United States.

    However, we are paying for that Canadian oil in US dollars that are now worth LESS than the “Loonie” (the Canadian dollar). Indeed, at one time, in the late 1990s, the Canadian dollar was worth only about $.66 cents US. And, unfortunately (for us…not the Canadians!) their Loonie is now worth about the same as our US Dollar.

    So we have absolutely NOBODY to thank for that development but all those “tax and spend” clowns down in Washington who can’t seem to resist running up our horrific national debt by printing more worthless money to fund their “pork barrel” projects as well as throwing hundreds of billions of those ever more worthless dollars at their buddies on Wall Street, all in a totally useless effort to bail them all out of a situation that was largely of their own (and Congress’s) making.

    Indeed, respected investor services like Moody’s and Standard and Poors are now getting set to further devalue our US Government bond ratings as a direct result of our ballooning government deficits and our ever-increasing (to the tune of tens of trillions of dollars) in national debt.

    Unless and until we throw ALL of these bums out of office and start electing some FAR more fiscally conservative Senators and Congresspersons, we can expect that the cost of ALL petroleum products in the United States will continue to go through the roof as time goes on.

    • Almandine  January 3, 2011 at 6:47 pm

      Thanks for clarifying my point Keith. The “apparent reason” is the inflation in the money supply, and thus prices, compliments of our govt and the Fed, not increased demand, or limited supply, relative to recent history. A current look at supply and demand reveals what should amount to reduced upward price pressure. The US Energy Information Admin puts it in perspective:

      http://www.eia.doe.gov/emeu/steo/pub/contents.html

      The value of other currencies is only important in a currency-exchange sense, as oil is most generally priced in US dollars, with the global price being set to a large degree by the OPEC cartel (and now Venezuela) with little regard to actual demand, unless it increases or decreases substantially. OPEC has set a “floor” price under oil for quite some time to keep their incomes steady during the world recession.

      So yeah, we should kick our bums out.

  3. Eve  January 3, 2011 at 6:18 pm

    If the “Feds” claimed that the earth was flat and did it on nightly TV, most in the US would probably believe that too.
    “Hey, it’s on TV so it MUST be true.”

    Until citizens are educated enough to realize the false dichotomy of the “supposed” two (actually being one) political parties, nothing will change.

    Until they begin to care about their “actual” lives, instead of the ones they live vicariously through others (through TV sitcoms, video games and ESPN) this problem will continue.

    Until they refuse to sit down every night in front of their hypno-idiot-boxes and be mentally spoon-fed opinions by so-called “experts” (who happen to have an agenda which is contrary to the well-being of the US populace) this will continue.

    Look at the bright side … for most, their slide into absolute poverty will be gradual and slow.

  4. Almandine  January 5, 2011 at 1:54 pm

    Dollars Up? Says who? For how long?

    http://neithercorp.us/npress/2011/01/economic-consequences-of-the-%e2%80%9cnew-world-order%e2%80%9d/

  5. woody188  January 5, 2011 at 4:17 pm

    Actually it will rise for the first half of 2011. Then it will fall to new lows in the second half.

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