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So the Dollar is Doomed

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By EightTrack1
November 29, 2004

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Unless you've been living in a state of communication autarky, or set your TIVO solely for Law & Order reruns, you've likely noticed that Americans everywhere are split into two camps: those who are focused on the implications of the falling dollar and those who are riveted on the future of Desperate Housewives.

Although I am not a Desperate Asset Manager or worse yet, a currency trader, I do focus on the US Dollar-Korean Won relationship because I import product from South Korea.

If I recall correctly, South Korea's currency, except for the South African rand, has performed the best against the dollar this year (at least among major currencies).

Obviously Warren Buffett's currency positions (if still active) have drawn a lot of attention. I know that posters on a lot of boards are quite worried about the dollar, our deficits (trade and current account), our consumer debts, etc.

The problem I have with this dollar freefall talk is that when you sell the dollar to buy the Korean won, for example, you're not only selling dollars, you're buying won.

That seems perfectly obvious ... but I wonder if all the traders, pundits, posters, and others know what they're getting when they buy the won, or other currencies.

In the case of Korea, they're getting an economy whose sole economic driver is currently exports (about 60% of the economy). They're getting a domestic economy in the dumper, with consumers that make Americans look like tightwads (one in 13 South Korean are behind on debt payments). They're getting an economy with more overlap than American with Chinese competitors, and they're getting leveraged corporate balance sheets. As an aside, Koreans went kimchi wild on credit card debt a few years ago.

Like many other small Korean exporters, I made business assumptions that the won would average about 1150 to the dollar this year. It's now around 1050 to the dollar and dropping. My Korean manager is worried, all of his fellow small businessmen friends are worried, and they're all concerned that they can't make money at 1050 or perhaps even 1100 to the dollar. Lots of them planned on 1200 to the dollar, which was common in 2003, yet the won strengthened in 2004.

Here's a chart of the trade weighted exchange index, from the Fed.

I wonder if the dollar had stayed steady at 1997 levels, or alternatively, fallen slowly and gradually from 2000 levels, would we be reading so many breathless articles about the plight of the buck?

Why is the 2002 "strong" dollar value presumed to be more "right" than today's "cheap" dollar?

In any case, it's always interesting to note when general consensus is widespread: the dollar must go lower - a lot. I don't know too much about European or Japanese economies, but watching what has happened to the Korean won, I have a hard time believing that the dollar is doomed to massive depreciation from this point on. Everyone is worried.


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