Don't Fear the Decline of the Dollar Just Yet

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Physician's Money Digest, October 2005, Volume 12, Issue 14

It seems the US trade deficit makesheadlines just about every week.Despite all the negative hooplaabout this country buying morethan it sells, there is a positivespin. For example, both Germany andJapan have trade surpluses relative totheir gross domestic products thatmake them the envy of the world,except that both their economies arelimping along. America, on the otherhand, remains near the top of the heapamong all nations in growth.

Imported Dollar Woes

Wall Street Journal

Part of the deficit/surplus problem isthat virtually no other nation is growingmuch. Therefore, they aren'timporting from the United States asthey have in the past. On the otherhand, this country is growing fasterthan most of the rest of the world.According to the ,although it would be wonderful ifJapan, Germany, and France wouldexpedite their growth, the UnitedStates shouldn't slow down, so insteadAmericans will import less. That is justcommon sense, isn't it?

We have had more questions aboutthe sagging US dollar since the first ofthe year than in the previous 5 yearscombined. People from all walks of lifeare starting to get worried about atotal collapse of the greenback. That'sthe most positive sign we know thatthe dollar has little room to fall andisn't anywhere near collapsing, becausepeople tend to let their emotions rulewhen things look bad. It's akin to thenotion that the further a stock falls, thefurther it has to fall, which is untrue.

Jeremy Siegel, a professor at theWharton School of Business, looks atthe situation this way, "The swiftdecline of the dollar in the last monthsof 2004 brought out the fear mongers.They proclaim that the US trade deficitpumps hundreds of billions of unwanteddollars into the world market andthat a further steep drop is inevitable.These pessimists advise investors to selltheir dollar assets and buy gold, preciousmetals, and international bonds."

Not-so-bleak Future

"My advice is to relax. A dollar crisisis not in our future," Siegel says."Foreign central banks and ourFederal Reserve have enough firepowerto prevent a dollar collapse and tokeep the international currency marketsvibrant. Our currency is sound,and it is likely far nearer the bottomthan the top of its range."

Edgy investors read too many articleswritten by people who don't knowwhat they're talking about, especiallywhen it comes to the trade deficit andthe US dollar. The headlines keeptelling us that the dollar is hitting anew low against the euro, which hasonly been in existence for 6 years.That's true, but by figuring what theeuro would have been worth prior toits official formation in 1999, the dollartouched a low of $1.66 per euro in1992, which is much lower than it isnow. Similarly, the dollar slumped to alow of 80 Japanese yen in 1995, wellunder its current value. However, theUS economy, bonds, and stocks werestrong during both of these periods.

Bill Staton is chairman of Staton Financial

Advisors LLC, a money management firm.

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