Indy Telecom & Industrial Media

The NYT has an excellent article by Professor Tyler Cowen on how a falling USD is not all bad news. The WSJ also has a related article that talks about how the USD may actually rebound.

The crux of both the articles is this that while the USD may have had a significant fall (~19.8%), it still isn’t grounds for fear. For one, it has definitely helped bridge the trade-deficit gap because imports coming into the US are becoming more expensive while exports going out from the US are becoming cheaper.

In fact, some of the people hardest hit by the falling USD are European businesses. As the USD falls, it becomes harder for them to compete in their own local regions because it is a lot cheaper to buy American stuff paid for in USD than it is to buy European stuff paid for in Euro.

Secondly, the WSJ talks about a 30% fall in the USD to equalize the trade deficit — and we’re almost at 20%. Now whether the USD falls another 10% remains to be seen, but once again, that need not necessarily be a bad thing all around.

Also, other economies in the world are in just as bad a shape (or worse) than the US economy. British, Canadian, German and French economies are also struggling, and the falling USD isn’t necessarily helping them, either.

Now, the Chinese are whole another story. That’s a mixed bag — while they have over a trillion in dollar-dominated assets, they aren’t too particular about dumping it all overnight, simply because of what it might do to their assets. It is in their best interests to have a strong dollar, especially since we are their largest consumer.

The biggest problem that’s likely to arise from a falling USD is of course worries about volatility. A shaky currency is not good for any economy, and ours is no exception. And of course, the middle-east, who make money off oil, no matter which way things go.

I think that over the next quarter or so, the USD will slowly stabilize, and that the fall in the USD that’s happened is not necessarily a bad thing for us.

One thing that a lot of people seem to forget is that while a falling USD is not a good thing, it certainly isn’t bad all around for everyone. For instance, the cheap dollar has made items made in US extremely competitive in terms of pricing, especially in comparison to European goods and services within Europe.

As a result, a lot of US products have been in high demand (especially high-tech), causing a serious surge in US exports which has lowered the US trade deficit to record lows in more than 2 years.

And the consequence of a weaker dollar is making it harder for Americans to spend on European goods and services, making the European Central Bank chief to worry that the recent rise of the Euro against the dollar is making life harder for European businesses.

Now China — that’s an entirely different story altogether.

Remember that whole thing about sexy, hot models not wanting the USD? Well, turns out that it may not be entirely true.

CNBC has an update where the manager of the babe supermodel in question clarifies that she did no such thing.

They also offer the following clarification –

Nelson points out that Gisele lives in New York City, and thus needs U.S. dollars for her big-city lifestyle.

And American fans and contracts, of course.

Dealbreaker puts it best –

Also, it’s hard not to think that some sort of PR spin went into this denial. Gisele if you’re short the dollar, the American public will be short you! Retract, deny, rinse, repeat.

Of course it did. Then again, I guess if you are a rich hot babe, you can pretty much do whatever the heck you want.

Apparently, the dollar isn’t just scaring hedge funds and financial investors. Gisele Bundchen, the highest-paid Brazilian supermodel does not want to be paid in US dollars anymore.

That’s right, folks. You know things are bad when the (hot) women decide the dollar isn’t for them anymore.

Damn, and here I came to the US thinking that I could earn the big-bucks in USD so that I can get all those hot women (for cheap, no less). Oh well, I guess I’ll just have to move to Europe.

I was talking with someone at work the other day and we got talking about how companies should protect themselves against currency fluctuations. Given the recent conversation that’s been taking place on my article on the failing US Dollar, this was something that caught my attention.

So, how do you protect companies operating in more than one part of the globe from forex fluctuations?

One obvious way, of course, is to hedge your conversion, either by forwarding, spotting or swapping your contracts. This is usually the most effective way, but it does come with its own problems.

The second way is to have a reserve where open currency convertibility can happen, which while not oblivious to market fluctuations does let just your reserves take the beating.

The third way, depending on the country, is if you have free currency convertibility available (e.g. an American company operating in countries that allow free dollar convertibility w.r.t the local currency).

Of course, some economies by themselves tend to project a stable (or penned) value w.r.t other major currencies, in order to encourage investors and trade. China is the perfect example of this, where everything is pegged to their biggest consumer - the USA.

So, are there any other ways in which companies could protect themselves against such fluctuations. The reason, of course, is that the company that we were talking about wasn’t doing that good a job, and we were wondering if they were hedging at all, or if they were, they weren’t doing it properly.

Thoughts?

Jim Rogers, who worked with George Soros to build the multi-billion dollar Quantum Fund, feels that the US is “undoubtedly” in a state of recession. Not that I necessarily disagree with him; but I just feel that the market may need to make as much as a 10% correction before it can think of going back to being in the green. That could take as little as six months, given that there have been a lot of write-downs by financial institutions — or as long as a year or more.

Of course, that’s assuming that the shrub in power does not do something ridiculously stupid (you know, like attacking Iran) or some such crazy thing. In which case, we all can go back to living in caves etc.

And to top it off, Rodrigo Rato, the IMF chief, has warned that the dollar may suffer “abrupt failure”. And of course, other countries are taking steps to temper their local currencies from appreciating too much against the dollar, mostly because some of them are worried about a repeat of the late 1980s. This includes Asian countries (especially India and China) and of course some European countries which are wary of the sharp rise of the Euro against the US Dollar.

The US Treasury secretary had these pearls of wisdom to offer us –

US Treasury Secretary Henry Paulson, addressing the plenary session of the 185-nation twin financial institutions, also sounded a note of caution.

“We need to continue to be vigilant, because all of our capital markets are not yet functioning normally,” Paulson said.

“Not yet functioning normally” — when financial institutions are announcing losses in multi-billions and profits fall over 90%, not normally is as good a phrase as any, I suppose.