2007 September 20 Thursday
US Dollar Hits Parity With Canadian Dollar And 2 Dollars Per British Pound

The dollar hit a record low against the Euro.

FRANKFURT, Sept. 20 — Investors around the world dumped the dollar today, pushing it to an all-time low of $1.40 against the euro and to parity with the Canadian dollar for the first time in three decades as currency traders digested the full implications of the Federal Reserve’s new course for interest rates.

In a nutshell: The US trade deficit has forced the dollar down against unmanipulated currents to compensate for the inability of the dollar to drop against East Asian currencies. Oil hit a new high too. That makes sense. As the dollar declines the price of oil drops in other currencies and that pushes up demand for oil from other countries. Hence the price of oil rises in dollar terms.

At some point the US dollar has to go down against the Chinese and Japanese currencies. The tie of the East Asian currencies to the dollar has driven their value down against the Euro even as they run up huge trade surpluses.

European Central Bank President Jean-Claude Trichet and French Finance Minister Christine Lagarde urged Asian governments to let their currencies appreciate more to close disparities in global trade.

``The yen and the yuan in particular are currencies whose level and spread pose a problem to global trade,'' Lagarde told reporters today after a meeting of euro-area finance chiefs in Oporto, Portugal. Trichet singled out China in saying it is ``desirable'' that Asian nations without floating exchange rates allow more movement in their currencies.

The Europeans are looking at a deluge of cheap goods from America and East Asia. They do not want the US trade deficit to become a European trade deficit. They aren't going to be as complaisant as American policy makers have been about the US trade deficit.

The Canadians are on a roll in large part due to Alberta oil sands production.

Consider what has happened since: the unemployment rate has slid to a 30-year low of 6.0%, wage gains are rolling along at a 4.0% clip, the Toronto stock market is near record highs, house prices have soared, government coffers are overflowing, the strong dollar has helped turn us into champion consumers and we are on the cusp of becoming a creditor nation -- joining the elite ranks of countries like Germany that own more abroad than they owe.

And oh yeah, the world has finally figured out that Canada holds the world's second-largest oil reserves after Saudi Arabia.

Oil hit another new high.

Crude oil prices jumped above $84 a barrel late on Thursday after production platforms in the Gulf of Mexico were shut down ahead of a threatened tropical storm.

Nymex October West Texas Intermediate hit a record $84.10 a barrel, up $2.17, but settled at $83.32, up $1.39 on the day. The October contract expired at the end of trading. The most active November WTI contract was up $1.05 at $80.75.

This is a good time to bring innovative energy technologies to market.

The declining dollar is good news for US manufacturers. But more expensive imports and higher oil prices could combine with the housing bust to push the United States into a recession.

Share |      By Randall Parker at 2007 September 20 06:50 PM  Economics Trade

Stephen said at September 20, 2007 9:53 PM:

The US needs to keep selling dollars overseas to stay afloat, but that's getting harder (ie demand for the USD is eroding) because investment in the US returns too little given the increasingly high risk.

Fortunately, China and the other cheap exporters are happy to take USDs in return for supplying the US with cheap manufactured goods, and thereby China has almost single-handedly protected the US from a major collapse in the USD. Similarly, the other advanced economies should be thanking China for providing them with somewhere to invest where the returns are worth the risks.

US = junkie
China = pusher
Europe = financier

The key is to not let the junkie OD (or for that matter, recover).

Gary Glaucon said at September 22, 2007 6:29 AM:

Run on U.K. banks? U.S. interest rates dropped? Gold at a high? Long term mortgage rates are up? Greenspan is worried about inflation? This is a mess that will soon unravel.

Bob Badour said at September 22, 2007 6:08 PM:

Confused? You won't be after tonight's episode of Soap!

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