Over the weekend, China announced it's relaxing its fixed exchange rate, or peg, with the dollar. The yuan rose 0.42% to 6.7976 per dollar. This puts more downward pressure on the dollar, and raises the question "Is the dollar losing its grip as the world's global currency?"
Last week, former Federal Reserve Chairman Alan Greenspan warned that the $13 trillion U.S. debt is the largest threat to the dollar's strength. (Hat tip to Tony Richardson, President RichardsonHeritage Group, for alerting me to this article.) To pay for this debt, the government has been flooding the market with U.S. Treasury notes. Normally, demand for the dollar would fall, and interest rates would rise as a result. However, the Greece debt crisis makes the dollar more attractive than the euro. Greenspan warned this effect is only temporary, and ultimately debt will drive the dollar down.
The third threat to the dollar is the $1.84 trillion in excess cash being held by non-financial companies. (Thanks again, Tony!) The Great Recession made companies afraid that credit will disappear again, just like it did on September 17, 2008. When businesses start spending again, it could dump dollars into the economy - increasing the supply beyond the demand, which would lower the dollar's value.
Banks are also sitting on $1.1 trillion in cash. However, this won't cause a dollar decline. Why are banks hoarding cash? They need to write down 18 months of potential foreclosures that are in the pipeline. As I mentioned last week, cash is also king for commercial property owners for the same reason.
How It Affects You
In this stage of the business cycle, a weaker dollar means a growing economy. When businesses start spending their hoarded cash, it also means more jobs. Even China's announcement spiked the stock markets because investors knew it meant China was feeling confident about growth.
However, a declining dollar will also mean higher prices, especially for imports. What's the best hedge against a weaker dollar? Read the excellent suggestions in Hedge Against a Dollar Decline.
(Photo Credit: Chung Sung Jun /Getty Images)