A reader recently sent this
note about the falling US dollar.
“Dear Gary, PIMCO, the largest bond
fund, believes the magnitude of the U.S. currency's downtrend
is "as great as 20-25 percent, and perhaps greater than
that" and is starting to adjust its portfolios accordingly.
Warm regards, Craig”
I took a look at the article and it says: “NEW
YORK (Reuters) - PIMCO, the world's leading bond management
fund, said it has raised currency exposure in its bond portfolio
amid expectations that the dollar is about to embark on a
large-scale downtrend. In a report released Thursday, William
Powers, managing director of PIMCO's portfolio management
and investment strategy groups, said the bond management
firm has increased its currency exposure to 5 percent from
”The fund was constrained to limit
its currency exposure to 3 percent in the past because of
volatility in the currency market. Today with the likelihood
that the dollar is about to embark on its next downward leg,
PIMCO's Investment Committee has increased the tolerance
for currency exposures," said Powers.
PIMCO will also maintain a diversified portfolio
to include the yen, euro, and emerging market currencies.
Overall, Powers has a bearish outlook on the dollar, saying
the magnitude of the U.S. currency's downtrend is ‘as
great as 20-25 percent’, and perhaps greater than
the entire article
This is the second credible source (an OECD
report suggests that the dollar could fall even 50%) that
believes a catastrophic loss of the dollar’s parity
could occur. Recent messages have been looking at other currencies
so we can know where to go. But we have not answered the
question, what does the dollar’s loss really mean?
First, it means that goods from overseas
will cost more. I recall clearly my college days (about 1965)
when my friend Randy got married and sold his sporty Jag
XK-150 to buy a Toyota sedan. He paid something like $1,200
(perhaps $1,800) for this brand new car. We laughed at him
because Japanese cars were considered junk then. Now Toyota
and Hondas cost so much to produce in Japan that US plants
have been built for their manufacture.
Cars are very different now, but, had nothing
changed that car that was $1,200 then would be $4,800 now..just
because of currency depreciation of the dollar to the yen
that created inflation in the US. The yen was over 400 yen
per dollar then (in the 60s) and is about 110 yen per dollar
Second, it means that trips abroad will
cost a lot more. If the dollar drops 25% to the euro, a hotel
in Paris that costs $199 a night now, the price will be about
$299 a night, if nothing else changes. Oil prices are likely
to keep climbing so this also means that the air fare to
get to Paris will be 10 to 15% higher as well.
Third, prices for everything will soar.
The rising costs of imports (upon which we so greatly depend)
will rise. This will filter through the entire US economic
system. Take Walmart as just one example. Business Week’s
Oct. 6 cover story outlined how Walmart’s $12 billion
in imports from China last year accounted for a tenth of
total U.S. Chinese imports. If the dollar drops 25% against
the Chinese yuan, the cost of all those imports will rise
about 25%. US workers will need higher wages to compensate
for this. Businesses will need to charge more for their products
to pay for the higher labor costs, etc.
Finally, one thing we can be sure of: some
people will become richer in relative terms (because they
jumped into inflation fighting investments). Tomorrow we
will see what some of these inflation fighting investments
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