US dollar: Prepare for a prolonged devaluation

What was not included in the speech was the fact that the only way in the short term to sell more products to other countries is to actively pursue a low-dollar policy that makes American exports less costly to these markets. A weaker dollar also makes imported goods more costly for American consumers, thereby further reducing the trade deficit. Simply put, in order to meet the administration’s aggressive goal of reducing the trade deficit through a doubling of exports, a weaker US dollar is the new reality.

Naturally, the prospect of a devalued US dollar has China concerned. In 2009, the US Census Bureau placed the yearly value of China’s exports to the United States at $296.4 billion or 17.7 percent of China’s total exports. Of course, China is no stranger to currency controversy itself and both sides have routinely accused each other of unfair trade practices. But the rhetoric reached a new level when a trade bill was recently approved by the House of Representatives. If the bill is passed into law, US officials will be free to introduce tariffs on Chinese imports that will decrease the price advantage typically enjoyed by Chinese manufacturers.

While the US market remains an important export destination, China is hard at work cultivating new customers and many of these are to be found within her own borders. The increase in demand for consumer products within China is advancing at an unprecedented rate, and the domestic Chinese market – together with other emerging Asian nations – is universally recognized as the largest untapped pool of consumers on the planet.

China will not replace the American market overnight; indeed, it will likely never withdraw from the US entirely. Still, it is clear that a move is on to decouple China’s future from the US by reducing its dependence on the American consumer.

So what does this mean for America and more specifically, the US dollar? In the short-term, there is little doubt that the Federal Reserve will enter into a new round of quantitative easing to inject more cash into the economy. This action alone will devalue the dollar, and the continuation of record-low interest rates will further reduce demand for the buck.

This leaves holders of US assets in a bit of a quandary. If the falling dollar appears to be a short-term phenomenon, then it may be feasible to ride out the downturn and hope for a quick turnaround. If however, a weaker US dollar is destined to be with us for awhile, investors and savers may need to look beyond dollar-denominated assets in order to protect investments over the long term.

–Scott Boyd is a currency analyst and writer for Oanda, a Forex trading company with offices in New York, Toronto, Singapore, and Dubai. Neither Mr. Boyd nor Oanda take positions in any currencies.

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