Dollar down, all else up?

There is a relationship that many pundits dont seem to bring up. As our dollar has fallen in value, all things denominated in dollars must rise. This is classic devaluation.

The globalgurus thoughts:

The U.S. economy has become dangerously dependent on foreign capital. Foreign investors have (finally) tired of financing the profligate ways of the United States and are betting against the dollar -- sending it even lower. Foreign central banks -- fearing the United States may not be able to repay its huge debts in outstanding Treasury bonds -- are rushing to unload their Greenback reserves. This will lead quickly to a dollar collapse. This in turn would prevent the Fed from cutting interest rates, tipping the Titanic that is the U.S. economy into the cold waters of economic depression.

Despite hitting record lows against some currencies, overall it has fallen by less than 1.5% since the financial turmoil hit in early August. It may have hit record lows against the euro, but that's against a young currency. According to research by Brown Brothers Harriman, the now-defunct German mark hit a record high in 1995 that would be the equivalent of a euro level of $1.4575.

It's also hard to crash if you've already been slowing down. The U.S. dollar has already fallen by some 20% since its recent peak in 2002. Indeed, growth in U.S. exports is already shrinking America’s external deficit. Throw in falling domestic demand, imbalances begin to correct themselves just like the economics textbooks said they would.

The bottom line? Currencies are part of a complex system. Push one lever, and another one moves in ways that you cannot often predict. And as tempting as it is to make it into a moral issue, analyzing it through the cold, hard lens of facts rather than rhetoric

The largest risk to America and the global economies isn't a recession or a prolonged retraction of US growth from slower consumption, but rather the risk that currency volatility will derail a few large money center banks who bet the wrong way.