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Wednesday, September 12, 2007

Say What?

I have a PhD in economics so naturally I cannot understand this CNNMoney article about the falling dollar. The article talks about the ailing subprime markets blah blah and how this has hurt the dollar, pushing it to all-time lows against the euro. But it also says this:

And that's about where the dollar will be for awhile, foreign exchange experts say. The euro is not likely to trade much higher than $1.40 in the coming weeks, especially if the U.S. economy is hit with more negative news such as a disappointing read on August retail sales due out on Friday.

Why would disappointing news about the US economy prevent the euro from rising against the dollar? Wouldn't this make it more likely that the Fed would cut rates (or by a larger amount), which all the financial articles say will cause the dollar to fall against other currencies?

The only thing I can guess is that they're arguing that weaker US economy ==> lower US demand for imports ==> stronger dollar. But I'm not so sure about that last step of the argument. Sure, other things equal, if US consumers try to buy less foreign stuff, then the supply of dollars in the forex markets shrinks, and USD goes up.

But by the same token, if foreign investors get bad news about the US economy, won't they be less willing to invest in dollar-denominated assets? So the demand for dollars in the forex market shrinks, and on net it's not obvious which way the price of USD (in other currencies) will move.

2 comments:

  1. Woody8:36 AM

    Perhaps he has a B.A. in english or journalism, and simply liked the way it read. It makes people feel better to think the dollar won't fall much further. Feel better => sell more news = good economics.

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