US smiling as US Dollar depreciates. Why? Read on.

US Dollar depreciation is helping US and therefore we are not seeing any substantial action by US authorities to stop the depreication

We all are talking about the US Dollar depreciation. There are lot of talks going around about will Dollar be a world currency anymore? Is it worth to buy Dollar Assets as it is getting more volatile then ever?

These questions are valid if we look at the macro level and without any clear introspection into the depth of the issue. However if we look into depth, and ask one simple question :- Who is benefitting from this depreciating USD? Very obvious answer is:- United States of America.

US have a current account balance of USD -731 billion (2007 CIA estimates). This means it is importing more (goods, services and investment income), then exporting (goods, services and investment income). Only exports-imports = $821 billion. The difference in US current account and trade balance means, it is importing return on its foreign investments or it is selling part of its foreign investments or taking debt. Now in any case, if Dollar depreciates, it helps US in following ways:-

· Its exports become more viable. US exports consist of 27% capital goods and 49 % consumer goods, 76% combined. Its imports consist of 30.4% capital goods and 31.8% consumer goods, 62% combined. Now these 4 are amazing set of numbers. If dollar depreciates say by 10%, it directly tilts the balance in favour of exports and only these 2 segments can immensely improve the export-import trade balance in US’s favour. Assuming everything else constant, 10% depreciation can result in reduced imports and reduced imports bills.

· Trade imbalance improves. Let us take the example of USA’s largest trading partner, Canada. US exports 20.1% of its total exports to Canada and imports 15.7% of its total imports from Canada. In 2002, CAD index/ USD index was 0.55, it peaked at 1.40 in early 2008, dropped after that to 0.90 and now is back at 1.30. What does this say? Canada will struggle to maintain its trade surplus which stood at $78 billion in 2008. If CAD keeps on appreciating (it being more and more dependent on Commodities) and USD keeps depreciating, US will become better off of the 2 in coming years. One known casualty of this is Canadian Lumber industry.

· US external debt stands at whopping $13 trillion. Now depreciating dollar increases this debt numbers in US Dollar terms. But does that really matter until you are going to repay it. As of now US is going to borrow more. As per Goldman Sachs, it is going to borrow $1.7 trillion in final half of 2009, $1.4 trillion in 2010 and $1 trillion in 2011. Depreciating currency reduces these borrowing in foreign currency denominations. Depreciating Dollar automatically helps the cause as in near future US is net borrower and not lender.

Now let us see the US Dollar index performance:-

This is the index of USD pegged against 6 currencies (Euro: 57.6%, Yen 13.6%, Pound: 11.9%, CAD: 9.1%, Krona: 4.2% and CHF: 3.6%).

US dollar is very close to its historic lows of 72. If the trend continues and index created new lows, the worry is for countries exporting to US, holding USD reserves and not USA. Take the case of China, if Dollar depreciates, it makes its exports to US unviable. China being one of the largest investor in US Treasury (it holds $797.1 billion in Treasury), puts it in fix. If it sells dollars, Dollar depreciates further and Chinese Dollar assets declines, exports are hurt. Therefore China cannot liquidate its Dollar assets so easily.

To conclude, depreciating USD, is helping the current cause of United States, as it can help improve its deficits, monetarily on papers and in real terms by improving the export-import trade balance. It further helps to take more debt in short term (which it badly needs). Figures further support the fact. Foreign investors hold $3.45 trillion (in August) as compared to $3.08 trillion (in last December) according to Treasury department. Is world liquidity Dollar Assets? Actually not, they are buying more and helping the short term and long term US cause.

Therefore, whatever the furore is, USA is not doing anything substantial to appreciate its currency and is smiling happily as of now at the expense of others. Monetary and financial world being a tricky and thin line, of which policy will work for and which works against, makes this a very interesting time in history. Coming decade will be very interesting as it will give the answer to question:- Who smiled the last? Right now it is USA.

Disclaimer:- Facts, figures and views mentioned above are personal and does not indicate or reflect anyone else's view point or policy. It is only for the purpose of discussion and should not be considered right or wrong.

In response to Linkedin Question :- Weather Economy is decided by Crude Oil or Money?

Oil is just a commodity, yes a large one but after all a commodity. It is a resource required to drive the demand of various activities in the economic growth and set up of Economies. In 2008 almost $2.7 trillion of Crude Oil was traded, big enough right. But when you compare it to World GDP it is less than 5% of almost $60 trillion (World GDP). Yes there is lot of value added at various stages and that increases the influence on Crude Oil in deciding the final GDP numbers. But certainly it is not the Economy decider.

2nd factor which can explain you about why it is not the only driver is CPI. Energy including oil are 17% of Inflation basket (in US). There are 83% other things that is part of inflation basket, so does it explains the World GDP or economies certainly not.

Gulf Countries, they are always profitable even if Oil trades at 30$, if they have excess cash, they create Soverign Wealth Funds and invest in other countries, so higher prices doesnt mean more local investments.

Now coming to money.

Money supply drives prices, no matter whatever the reason be. Price of any thing, stock, commodity, food will increase if more money is chasing it, but does that mean money drives economy certainly not, it is just the means to buy something once economy has given you enough power to buy something.

So what drives economies:-

1. People:- Countries need to be young to grow, where you have more earning population and less dependent population. In other words the earning population earns enough to take care of dependent population.

2. Economic development, which is dependent on government policies, open and investor friendly the country more wealth (in any form) will enter the economy thus making it grow.

3. Literacy. Can you name a developed world economy that is not literate, certainly not. More literate the people are, more connected they will be, more intellectual they will be and more options they will have to drive the economic activity.

4. Innovation:- Innovation does not mean only about winning Nobel Prize, it can also be doing something already being done, but in more efficient manner. Like, producing cheap, micro products etc.

To conclude: Crude is a commodity required to full fill certain tasks of economy. Money is one way of deciding the wealth the economy have and a mode of exchange, it in itself is not a wealth. Economy, is dependent on the activity that takes place within it or associated with it. Thus decided by all (All means all) the action that happens within it.

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