federalexpression

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Don’t Be Fooled By The Dollar Index

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The dollar index is up today. Good news right? Maybe. One expert will tell you it is bad for exports. Of course if you are traveling it is good. Blah, blah, blah. I’ll let the “experts” argue over those side issues. What does it mean for you and me? Not a whole hell of a lot. Let’s look at what the dollar index is shall we? It is a weighted measure of the value of the US dollar against other currencies. Here is the list and weights:

Abrev Currency weight  
EUR Euro 57.6
GBP Pound Sterling 11.9
CAD Canadian Dollar 9.1
SEK Swedeish Krona 4.2
CHF Swiss Franc 3.6
JPY Japanese Yen 13.6

Now when the dollar index moves you can get all tied up arguing over the economic impact that may have on imports and exports, trade deficits etc. To you and me it means very little. Why? If the price of milk is at $8 a gallon do I really care that the dollar index is up? Not at all. This is a classic shell game we are witnessing. Economists get on TV and tell you about a strong dollar or a weakening dollar but this index is simply comparing apples to oranges.

Let me try to illustrate my point. Suppose your neighbor, we’ll call him Mr. Euro,  just got a job at the local fast food joint flipping burgers at $8.25 an hour with no benefits and part-time hours.  Now, you just got a job pumping gas in New Jersey for $11 an hour. Your situation is definitely stronger than your neighbor’s. Are you pleased as you write out your student loan check?

What we are witnessing is a world-wide currency race to the bottom. How do I know this? Just take a look at the Gold Spot price 10 year charts against fiat currencies. All of the currencies in the dollar index are down massively in terms of gold. Gold was valued in the $300 range at the beginning of the decade. It topped $1400 in 2010. Here’s a little secret. Gold isn’t increasing in value, the dollar is in a race to the bottom.

If you have cash in the bank, it is losing purchasing power at a much faster rate than any interest you may be accruing. Compare what $300 would have bought 10 years ago to what it can purchase today. Now consider what an ounce of gold would buy today. The story is the same for every fiat currency in the dollar index. Just look at the curves on the charts. All the dollar index is telling you is whether the dollar is leading the charge to the bottom or if it is following other currencies on the way down at any one point in time.

Of course, I am no economist. Let me know what you think it means.

Written by federalexpression

February 4, 2011 at 2:30 pm

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