rope is not alone in concerns about their currencies' sudden appreciation vs the USD. The Japanese Yen is up 25% and in reaction, Japan spent $147 billion in the first quarter alone of last year selling its Yen mostly for dollars in another of its periodic and futile attempts to manipulate currency values. China is poised to raise its Yuan's peg with the USD since the dollar's decline has dragged the dollar-pegged Chinese currency lower with it and the falling Yuan now threatens to ignite inflation in China's already over heated economy. So as the Euro, Yen and other international currencies continue their rise in value as a counterpoint to the dollar's decline, there are economic costs at work.

It seems that in practice the world over, international economies, but not always their political leaders, prefer a weak dollar. Indeed, in a chorus that has grown stronger of late, the global political community is increasingly lamenting how our new era of globalization has become far too US-centric, and calls have become more urgent to fix a serious global imbalance. The source of this global imbalance of c

In 2004, The USD Was Falling, But the Dollar Was Never Weak!

Germany's long term economic policy has been to cultivate a permanent trade surplus by saving more, and consuming less. But there is another side to their trade surplus/high savings rate story. Growth in Germany is 1/3rd that in the US, while unemployment is double, productivity is similarly a fraction of what it is in the US. High taxes, over regulation, and a pension system that is in deep trouble, are costs that contribute to the broad structural deficiencies that hold the German economic machine back.

This comparison of the leading economy in euro land with America is an over simplified attempt to call attention to the importance of understanding the dynamics behind a country's strengths and weaknesses which, in the end, are reflected in currency values. So the Euro has been rising and the USD has been falling. What gives?

For starters, I believe we all can agree that the Euro's rise is less a story of Euro strength and more really a story about the dollar's fall. Dollar bears argue that long overdue structural reforms in the US need to be embraced now, and they point to a looming 6% trade deficit, as well as other issues that now seem to be threatening a disorderly collapse in USD values worldwide. My point of view is that the USD fall has been, bottomline, in a cyclical move lower from a previously over valued level in 2002 when the Euro was only worth 85 cents.

At this point the next long term move in the dollar is in large part dependent on the answer to one question:Does the US need structural reforms, or is it the other nations of the world who are under consuming and under producing that need structural reforms in order to restore balance to the global economy and to currencies as well?

In a modern environment of economic interdependence, money flows from around the globe increasingly affect individual, corporate and national wealth through nothing more than the changing value of currency relationships {forex is a $1.3 Trillion/day market}. Currency traders who understand the dynamics behind these changing foreign exchange values will profit consistently and substantially. Those who have drawn the wrong conclusions about the underlying forces of currency valuations are destined to be on the wrong side of currency trades and their losses will enrich those who have been right!

In today's foreign exchange environment one currency continues to occupy centerstage as the world's reserve currency--the US dollar. Gold and oil are priced in dollars. The dollar is involved in 85% of all currency transactions {Euro 37%, Yen 16%} and central banks the world over accumulate dollars as a necessity for stablizing the exchange value of their respective national currencies. Offshore central banks finance over 50% of the US trade deficit that way. Three out of four dollars now in circulation are held overseas. And today as we see the US dollar falling farther and farther, we know that the rising price of gold and the recent $50+ price of oil are each in great measure reactions to this current and anticipated further decline of the USD. In fact Saudi Arabia is letting it be known that it plans to adjust the new baseline price for its oil up from $25 to $35. Saudi Arabia has also been selling some of its dollar reserves in favor of the euro. There have been stirrings that China is substituting the euro for some dollars in its huge cash reserve accounts. Net, net, if markets see this trend continuing, the USD is certainly headed still lower. There is also more and more credible talk that the euro will replace the dollar as the world's reserve currency. After all the Euro now has a 20% stake as the reserve currency of choice by the world's central bankers, up from 13% a short time ago.

Counter intuitively, we find the strengthening euro is not a welcome development throughout much of europe and the world. Indeed today as we begin 2005 and find the Euro at historic high levels, up fully 50% from its lows of 2002, German Chancellor Gerhard Schroder is saying the new level of the Euro is worrisome for the German economy. The French Foreign minister is calling for an international conference to develop coordinated policies {read intervention} to staunch the Euro's climb against the dollar. ECB President Issing is troubled and has asked europe's consumers to start spending to help the eurozone avoid recession.

And europe is not alone in concerns about their currencies' sudden appreciation vs the USD. The Japanese Yen is up 25% and in reaction, Japan spent $147 billion in the first quarter alone of last year selling its Yen mostly for dollars in another of its periodic and futile attempts to manipulate currency values. China is poised to raise its Yuan's peg with the USD since the dollar's decline has dragged the dollar-pegged Chinese currency lower with it and the falling Yuan now threatens to ignite inflation in China's already over heated economy. So as the Euro, Yen and other international currencies continue their rise in value as a counterpoint to the dollar's decline, there are economic costs at work.

It seems that in practice the world over, international economies, but not always their political leaders, prefer a weak dollar. Indeed, in a chorus that has grown stronger of late, the global political community is increasingly lamenting how our new era of globalization has become far too US-centric, and calls have become more urgent to fix a serious global imbalance. The source of this global imbalance of co

e US need to be embraced now, and they point to a looming 6% trade deficit, as well as other issues that now seem to be threatening a disorderly collapse in USD values worldwide. My point of view is that the USD fall has been, bottomline, in a cyclical move lower from a previously over valued level in 2002 when the Euro was only worth 85 cents.

At this point the next long term move in the dollar is in large part dependent on the answer to one question:Does the US need structural reforms, or is it the other nations of the world who are under consuming and under producing that need structural reforms in order to restore balance to the global economy and to currencies as well?

In a modern environment of economic interdependence, money flows from around the globe increasingly affect individual, corporate and national wealth through nothing more than the changing value of currency relationships {forex is a $1.3 Trillion/day market}. Currency traders who understand the dynamics behind these changing foreign exchange values will profit consistently and substantially. Those who have drawn the wrong conclusions about the underlying forces of currency valuations are destined to be on the wrong side of currency trades and their losses will enrich those who have been right!

In today's foreign exchange environment one currency continues to occupy centerstage as the world's reserve currency--the US dollar. Gold and oil are priced in dollars. The dollar is involved in 85% of all currency transactions {Euro 37%, Yen 16%} and central banks the world over accumulate dollars as a necessity for stablizing the exchange value of their respective national currencies. Offshore central banks finance over 50% of the US trade deficit that way. Three out of four dollars now in circulation are held overseas. And today as we see the US dollar falling farther and farther, we know that the rising price of gold and the recent $50+ price of oil are each in great measure reactions to this current and anticipated further decline of the USD. In fact Saudi Arabia is letting it be known that it plans to adjust the new baseline price for its oil up from $25 to $35. Saudi Arabia has also been selling some of its dollar reserves in favor of the euro. There have been stirrings that China is substituting the euro for some dollars in its huge cash reserve accounts. Net, net, if markets see this trend continuing, the USD is certainly headed still lower. There is also more and more credible talk that the euro will replace the dollar as the world's reserve currency. After all the Euro now has a 20% stake as the reserve currency of choice by the world's central bankers, up from 13% a short time ago.

Counter intuitively, we find the strengthening euro is not a welcome development throughout much of europe and the world. Indeed today as we begin 2005 and find the Euro at historic high levels, up fully 50% from its lows of 2002, German Chancellor Gerhard Schroder is saying the new level of the Euro is worrisome for the German economy. The French Foreign minister is calling for an international conference to develop coordinated policies {read intervention} to staunch the Euro's climb against the dollar. ECB President Issing is troubled and has asked europe's consumers to start spending to help the eurozone avoid recession.

And europe is not alone in concerns about their currencies' sudden appreciation vs the USD. The Japanese Yen is up 25% and in reaction, Japan spent $147 billion in the first quarter alone of last year selling its Yen mostly for dollars in another of its periodic and futile attempts to manipulate currency values. China is poised to raise its Yuan's peg with the USD since the dollar's decline has dragged the dollar-pegged Chinese currency lower with it and the falling Yuan now threatens to ignite inflation in China's already over heated economy. So as the Euro, Yen and other international currencies continue their rise in value as a counterpoint to the dollar's decline, there are economic costs at work.

It seems that in practice the world over, international economies, but not always their political leaders, prefer a weak dollar. Indeed, in a chorus that has grown stronger of late, the global political community is increasingly lamenting how our new era of globalization has become far too US-centric, and calls have become more urgent to fix a serious global imbalance. The source of this global imbalance of c

clusions about the underlying forces of currency valuations are destined to be on the wrong side of currency trades and their losses will enrich those who have been right!

In today's foreign exchange environment one currency continues to occupy centerstage as the world's reserve currency--the US dollar. Gold and oil are priced in dollars. The dollar is involved in 85% of all currency transactions {Euro 37%, Yen 16%} and central banks the world over accumulate dollars as a necessity for stablizing the exchange value of their respective national currencies. Offshore central banks finance over 50% of the US trade deficit that way. Three out of four dollars now in circulation are held overseas. And today as we see the US dollar falling farther and farther, we know that the rising price of gold and the recent $50+ price of oil are each in great measure reactions to this current and anticipated further decline of the USD. In fact Saudi Arabia is letting it be known that it plans to adjust the new baseline price for its oil up from $25 to $35. Saudi Arabia has also been selling some of its dollar reserves in favor of the euro. There have been stirrings that China is substituting the euro for some dollars in its huge cash reserve accounts. Net, net, if markets see this trend continuing, the USD is certainly headed still lower. There is also more and more credible talk that the euro will replace the dollar as the world's reserve currency. After all the Euro now has a 20% stake as the reserve currency of choice by the world's central bankers, up from 13% a short time ago.

Counter intuitively, we find the strengthening euro is not a welcome development throughout much of europe and the world. Indeed today as we begin 2005 and find the Euro at historic high levels, up fully 50% from its lows of 2002, German Chancellor Gerhard Schroder is saying the new level of the Euro is worrisome for the German economy. The French Foreign minister is calling for an international conference to develop coordinated policies {read intervention} to staunch the Euro's climb against the dollar. ECB President Issing is troubled and has asked europe's consumers to start spending to help the eurozone avoid recession.

And europe is not alone in concerns about their currencies' sudden appreciation vs the USD. The Japanese Yen is up 25% and in reaction, Japan spent $147 billion in the first quarter alone of last year selling its Yen mostly for dollars in another of its periodic and futile attempts to manipulate currency values. China is poised to raise its Yuan's peg with the USD since the dollar's decline has dragged the dollar-pegged Chinese currency lower with it and the falling Yuan now threatens to ignite inflation in China's already over heated economy. So as the Euro, Yen and other international currencies continue their rise in value as a counterpoint to the dollar's decline, there are economic costs at work.

It seems that in practice the world over, international economies, but not always their political leaders, prefer a weak dollar. Indeed, in a chorus that has grown stronger of late, the global political community is increasingly lamenting how our new era of globalization has become far too US-centric, and calls have become more urgent to fix a serious global imbalance. The source of this global imbalance of c

in favor of the euro. There have been stirrings that China is substituting the euro for some dollars in its huge cash reserve accounts. Net, net, if markets see this trend continuing, the USD is certainly headed still lower. There is also more and more credible talk that the euro will replace the dollar as the world's reserve currency. After all the Euro now has a 20% stake as the reserve currency of choice by the world's central bankers, up from 13% a short time ago.

Counter intuitively, we find the strengthening euro is not a welcome development throughout much of europe and the world. Indeed today as we begin 2005 and find the Euro at historic high levels, up fully 50% from its lows of 2002, German Chancellor Gerhard Schroder is saying the new level of the Euro is worrisome for the German economy. The French Foreign minister is calling for an international conference to develop coordinated policies {read intervention} to staunch the Euro's climb against the dollar. ECB President Issing is troubled and has asked europe's consumers to start spending to help the eurozone avoid recession.

And europe is not alone in concerns about their currencies' sudden appreciation vs the USD. The Japanese Yen is up 25% and in reaction, Japan spent $147 billion in the first quarter alone of last year selling its Yen mostly for dollars in another of its periodic and futile attempts to manipulate currency values. China is poised to raise its Yuan's peg with the USD since the dollar's decline has dragged the dollar-pegged Chinese currency lower with it and the falling Yuan now threatens to ignite inflation in China's already over heated economy. So as the Euro, Yen and other international currencies continue their rise in value as a counterpoint to the dollar's decline, there are economic costs at work.

It seems that in practice the world over, international economies, but not always their political leaders, prefer a weak dollar. Indeed, in a chorus that has grown stronger of late, the global political community is increasingly lamenting how our new era of globalization has become far too US-centric, and calls have become more urgent to fix a serious global imbalance. The source of this global imbalance of c

rope is not alone in concerns about their currencies' sudden appreciation vs the USD. The Japanese Yen is up 25% and in reaction, Japan spent $147 billion in the first quarter alone of last year selling its Yen mostly for dollars in another of its periodic and futile attempts to manipulate currency values. China is poised to raise its Yuan's peg with the USD since the dollar's decline has dragged the dollar-pegged Chinese currency lower with it and the falling Yuan now threatens to ignite inflation in China's already over heated economy. So as the Euro, Yen and other international currencies continue their rise in value as a counterpoint to the dollar's decline, there are economic costs at work.

It seems that in practice the world over, international economies, but not always their political leaders, prefer a weak dollar. Indeed, in a chorus that has grown stronger of late, the global political community is increasingly lamenting how our new era of globalization has become far too US-centric, and calls have become more urgent to fix a serious global imbalance. The source of this global imbalance of course must be America! "The US consumer is consuming too much, he needs to stop that!"

Indeed, the emerging consensus in the popular and financial press which after studying all of this has announced that there are 3 reasons for the USD move lower since 2002, all pointing to the US. Too much consumption {leading to a record US trade deficit} with its flipside, a low domestic savings rate. And third, the US trade deficit's twin--a growing government budget deficit has become a dollar negative and is now contributing to a precipitous erosion in demand for the dollar.

There is an abundance of opinion among those who follow currency markets that indeed the fall in the dollar is due to these kinds of structural issues that call out for America to reform. America must consume less, raise taxes and save more. And so their answer to the question, "Is the USD weak?" is an emphatic yes because the US economy's structure is weak!

There is A Different Opinion!

The one thing to remember about currency markets is that just like water, they seek their own level. They inevitably find a balance and these protests against the Euro's strength suggests to me that the Euro is not quite ready to step up and dislodge the USD as a replacement in the global scheme of things for right now. It also suggests to me that the dollar's decline is cyclical and the USD therefore, even though it is falling, is not weak.

Nevertheless, there is reason to believe that markets are increasingly seeing the USD as now at a permanently lower plateau than in the past, and I agree. So let's revisit the pivotal question for currency trader's. "Is the USD weak, or is it falling in a normal cyclical adjustment?" We need to look closely at what is behind this dollar's move lower if we are going to be ahead of what's happening in the currency markets in 2005 and understand these dynamics so we can then profit in currency trades. Note:The Federal Reserve US dollar index of 26 leading currencies ranks the dollar's decline from Feb. 2002, at 14%. That was from what many consider to be an overvalued level with the Euro trading at less than 85 cents per dollar at one time. Today this basket of currencies shows the USD at the same level it was in 1994! In other words, it is in sync with past USD cyclical moves lower.

Despite the many statistics that show current USD valuations within historical ranges, many governments, political leaders, economists and currency traders believe the US is facing a crisis and must balance its trade account, reduce consumption at home and return to the balanced federal budget it had in 2000-2001. In the absence of such reforms, the US invites a disorderly collapse of the dollar which is certain to lead to global economic chaos

From the point of view of the international political community higher taxes would be an ideal answer and contribute to all three remedies. They would reduce consumption and thus help the import skewed trade deficit plus also help point toward a balanced federal government budget! They want to see taxes raised, consumers spend less and a slower growth rate in the US. It sounds like they want the German experience as the model for the US. Dollar bears and their adherents are prepared to short the USD until they can begin to see their remedies finding traction in the US economy. But currency traders who buy into these prescriptions will be on the wrong side of the USD trade in the long run. Dollar bears as they continue to sell dollars will have a long wait for any profits in anticipation of a collapse of the USD.

As a resident, citizen and student of the American economy, I can tell you, neither the trade nor budget deficits in the US are going into balance anytime soon. More to the point, barring a catastrophe, it is virtually impossible to see them doing anything more than narrow marginally. The domestic savings rate similarly is not going to rival the eurozone's 9% level, nor Japan's 6% for the foreseeable future. In fact, unless the American shopper miraculously morphs into a parsimonious European or Japanese clone {something that is not going to happen}, the annual American savings rate will not be surpassing even 3% anytime soon from its current 1% lows.

Quickly let's look at each one of these "concensus" causes for the USD's fall and learn why so many currency traders are jumping to the wrong conclusions about the USD, and we will see in the event, oppo