The dollar keeps sliding and I keep wondering when it's going to really bother financial markets.
Maybe the answer is, it won't.
U.S. manufacturers say the dollar was WAY overvalued and now it's just getting back to levels that help them compete in global markets (of course their worst trade "enemy" is China, and that government pegs its currency to the dollar so a falling dollar doesn't really fall against the Chinese yuan).
Nevertheless an orderly slide lower for the dollar gives everyone time to adjust, for portfolio managers to move money into Europe or Asia, away from U.S. assets.
It should help correct the thing the dollar is reacting to: a really big trade deficit which means our trade partners accumulate lots of dollars that they often plow back into U.S. bonds.
The problem is how long will they keep buying our bonds if they're losing money on them as the dollar falls?
If big central banks overseas cut back like they did in September, it means higher bond yields -- and higher mortgage rates, not exactly the kind of holiday present most of us in the U.S. are hoping for.
This morning on CNN Money Morning I interviewed Kevin Logan of Kleinwort Benson who said he is not particularly worried about the dollar's decline. He pointed out that the dollar has been falling for two years now, and in fact would probably have fallen a lot more by now if not for massive intervention by foreign central banks. Of course he's referring to Japan, number one, where the government has been buying record amounts of dollars and selling yen furiously to try to protect Japanese exporters from the scourge of a "too-weak" dollar, which will it make it harder for Japanese exporters to sell stuff in the U.S.
Then there's China which has quickly learned how to use the billions of dollars it gets from selling us -- the U.S. -- more and more refrigerators, sweaters, toys, and sofas every year. It also is becoming a major owner of U.S. government bonds. Great for long-term rates, the more they buy, the lower rates remain. Not so good if they start shifting out of dollars into other currencies.
And of course also applauding is anyone who still manufactures its products in the U.S. (yes there are actually some left, imagine that!) and will find it's products more competitive overseas the weaker the dollar gets. Again, not much help in areas where currencies are pegged to the dollar which are all over Asia, but very good against Europe for example where the euro has risen 16 percent against the dollar this year.
What's the worry?
Besides the concern that big overseas investors might tire of buying U.S. bonds -- and stocks -- while the dollar is falling and causing them to lose money, there's the worry about inflation. If the dollar weakens, then the stuff we import will cost more in dollar terms, and that will push the price higher and that could add to inflation. Up to about 15 percent of the consumer price index is influenced by import prices so it's not insignificant. But maybe it's not such a big deal to the extent that we buy a lot of our cheapest stuff from China and since they peg their currency we won't get much inflation impulse from them.
On that inflation question, another thing: inflation is only inflationary if you are willing to pay the higher prices that stores charge for their products. If prices go up and you keep paying them because you are doing so well it doesn't matter to you, then that sounds like the beginning of inflation to me. If you say I can't afford it and decide not to buy, not inflationary. Or, if you buy it anyway, but then have less money to spend and cut back on the purchase of something else, that also seems like it won't be inflationary.
So do we think the Fed is worried about this falling dollar? Probably not. There's so little inflation impulse in the nation's labor market it's sad for us workers. Average hourly earnings rose just 0.1 percent or one measly cent in November which translated into a year-over-year increase of 2.1 percent --- the smallest yearly increase since 1987! This slow wage growth, along with lingering job insecurity, will probably continue to make us penny-pinching bargain hunters for some time to come.
What the Fed might worry about at some point is if and when the sliding dollar falls so fast that it really does cause a stampede for the investment exits by big global players. That could force a little panicky rate-hiking by the Fed if it got too extreme, but as I said at the top the markets don't show that yet.
A final note: take a look at gold. One thing the strategists and analysts and even economists seem to agree on is the farther the dollar falls, the more gold moves higher. That could be the brightest note in this whole story so far.
Kathleen Hays anchors CNN Money Morning and The FlipSide, airing Monday to Friday on CNNfn. As part of CNN's Business News team, she is also a regular contributor to Lou Dobbs Tonight.
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