Last week, the dollar fell to new lows. Looking back at the past 30 years, the dollar seems to be moving in a pattern with its historical cycles. The chart shows the Trade-Weighted US Dollar Index on a 12-month moving average, since 1975. While on the downtrend, the dollar is still higher than it was in the mid 90's and the late 70's. Those periods followed with significant rises in the dollar. So should we be concerned?
What typically happens with this trend is US citizens spend more for foreign goods, but the demand rises for US exports. Why? The US dollar, because of its falling value, buys less overseas. Where a single dollar once bought a full dozen, 12, it now only buys 10. So, the value we get for one dollar reduces. However, those US products and services that normally sell big oversea will sell even bigger, because foreign currency gets more value than before. It is almost like a big sale at your favorite store, you would probably take advantage of the extra sale prices.
In addition, there is a almost perfect relationship between import prices and inflation. As imports continue to rise, so does the CPI (consumer price index), which is an index number measuring the average price of consumer goods and services. This is when patriotism knocks on the doors of us all and we must begin to balance our consumption and spend our dollars in markets where it is stronger for the US. On a brighter note, history shows that when this happens, the US dollar rebounds strongly.
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