Dollar Decline

The dollar weakened 20% against the euro between March 3 - December 1, 2009. This trend will continue, thanks to the $13 trillion U.S. debt. Other governments, like China and Japan, buy this debt. They are lending to the U.S. to keep us buying their products. But their loans are losing value because we borrowed so much money to save the global financial system. This high debt level makes them concerned that the U.S. will let the dollar decline so the relative value of its debt is less. As a result, they are diversifying their portfolios with more non-dollar denominated assets, especially the euro. Result? Higher import prices, contributing to inflation.

The good news is a low dollar keeps the Dow above 10,000. The stock market could plummet if investors get spooked. However, as long as the dollar loses value, the stock market will regain any lost ground. The other good news with a declining dollar is lower export prices. This will spur economic growth.