By: Harman Bajwa (bajwaharman@yahoo.com)

US smiling as USD (US Dollar) depreciates? Why? Read on!!!

US Dollar depreciation is helping US and therefore we are not seeing any substantial action by US

authorities to stop the depreciation

We all are talking about the US Dollar depreciation. There are lot of talks going around about will Dollar

be a world currency anymore? Is it worth to buy Dollar Assets as it is getting more volatile than ever?

These questions are valid if we look at the macro level and without any clear introspection into the

depth of the issue. However if we look into depth, and ask one simple question :- Who is benefitting

from this depreciating USD? Answer is:- United States of America.

US have a current account balance of USD -731 billion (2007 CIA estimates). This means it is importing

more (goods, services and investment income), then exporting (goods, services and investment income).

Only exports-imports = $821 billion. The difference in US current account and trade balance means, it is

importing return on its foreign investments or it is selling part of its foreign investments or taking debt.

Now in any case, if Dollar depreciates, it helps US in following ways:-

Its exports become more viable. US exports consist of 27% capital goods and 49% consumer

goods, 76% combined. Its imports consist of 30.4% capital goods and 31.8% consumer goods,

62% combined. These 4 are amazing set of numbers. If dollar depreciates say by 10%, it directly

tilts the balance in favour of exports and only these 2 segments can immensely improve the

export-import trade balance in US’s favour. Assuming everything else constant, 10%

depreciation can result in reduced imports and increased imports bills.

Trade imbalance improves. Let us take the example of USA’s largest trading partner, Canada. US

exports 20.1% of its total exports to Canada and imports 15.7% of its total imports from Canada.

In 2002, CAD index/ USD index was 0.55, it peaked at 1.40 in early 2008, dropped after that to

0.90 and now is back at 1.30. What does this say? Canada will struggle to maintain its trade

surplus which stood at $78 billion in 2008. If CAD keeps on appreciating (it being more and more

dependent on Commodities) and USD keeps depreciating, US will become better off of the 2 in

coming years. One known casualty of this is Canadian Lumber industry. US needs Canadian

commodities, which it can keep on importing, however US wants to manufacture more of

capital goods at home, thus making capital goods imports from Canada unviable.

US external debt stands at whopping $13 trillion. Now depreciating dollar increases this debt

numbers in US Dollar terms. But does that really matter until you are going to repay it. As of

now US is going to borrow more. As per Goldman Sachs, it is going to borrow $1.7 trillion in final

half of 2009, $1.4 trillion in 2010 and $1 trillion in 2011. Depreciating currency reduces these

borrowing in foreign currency denominations. Depreciating Dollar automatically helps the cause

as in near future US is net borrower and not lender.

Now let us see the US Dollar index performance:-

This is the index of USD pegged against 6 currencies (Euro: 57.6%, Yen 13.6%, Pound: 11.9%, CAD: 9.1%,

Krona: 4.2% and CHF: 3.6%).

By: Harman Bajwa (bajwaharman@yahoo.com)

US dollar is very close to its historic lows of 72. If the trend continues and index created new lows, the

worry is for countries exporting to US, holding USD reserves and not USA. Take the case of China, if

Dollar depreciates, it makes its exports to US unviable. China being one of the largest investor in US

Treasury (it holds $797.1 billion in Treasury), puts it in fix. If it sells dollars, Dollar depreciates further and

Chinese Dollar assets declines, exports are hurt. China is caught in this close ended loop and therefore

China cannot liquidate its Dollar assets so easily.

To conclude, depreciating USD, is helping the current cause of United States, as it can help improve its

deficits, monetarily on papers and in real terms by improving the export-import trade balance. It further

helps to take more debt in short term (which it badly needs). Figures further support the fact. Foreign

investors hold $3.45 trillion (in August) as compared to $3.08 trillion (in last December) according to

Treasury department. Is world liquidating Dollar Assets? Actually not, they are buying more and helping

the short term and long term US cause.

Therefore, whatever the furore is, USA is not doing anything substantial to appreciate its currency and is

smiling happily as of now at the expense of others. Monetary and financial world being a tricky and thin

line, of which policy will work for and which works against, makes this a very interesting time in history.

Coming decade will be very interesting as it will give the answer to question:- Who smiled the last? Right

now it is USA.

Disclaimer:- Facts, figures and views mentioned are personal and does not reflect or indicate anyone

else’s view point or policy. It is only for the purpose of discussion and should not be considered right or

wrong.