The U.S. Dollar Index is approaching its all-time low, but a number of factors may signal a rebound for the greenback. Image: Flickr/iChaz CC-BY-SA

Continuing a prolonged slide, the U.S. dollar fell in value to nearly its lowest level since August 2008 Tuesday against the currencies of major U.S. trading partners. Analysts say that Federal Reserve policies of low interest rates and billions in bond purchases, plus international worries about the U.S. debt situation are keeping the dollar down. Analysts also say that much like interest rates, what goes down must eventually come up and the U.S. dollar could be a profitable long-term investment.

Inside the U.S. Dollar Index

The U.S. Dollar Index (USDX) has fallen 2.7 percent in April and 6.6 percent so far in 2011. The USDX is a measure of the value of the U.S. dollar weighted against a basket of foreign currencies that includes the euro, pound sterling, Canadian dollar, Swedish krona, Swiss franc and Japanese yen. Upon its inception in 1973, the USDX was 100.000. In February 1985 it peaked at 148.1244. On March 16, 2008, the USDX hit an all-time low of 70.698. On Monday, the USDX fell as low as 73.744. Other currencies have been rising at the dollar’s expense. The euro has gained more than 9 percent this year and hit $1.4639 Monday. Despite the earthquake, tsunami and nuclear disaster in Japan, the yen has gained about 2 percent on the dollar in April. The pound sterling has gained 5.4 percent on the dollar in 2011.

Greenback destined to get weaker

The dollar could get even weaker in the next few months. Analysts expect that the Fed, which convened the Federal Open Market Committee Monday for a closely watched 2-day rate-setting meeting, will maintain a loose monetary policy consisting of interest rates near-zero and quantitative easing, the controversial bond buying program. There is also growing concern in the rest of the world that partisan bickering will preclude the U.S. government from adequately addressing the huge federal budget deficit. Those concerns were made tangible a week ago when the Standard & Poor’s rating agency lowered it’s outlook for U.S. debt. A weak dollar has been padding the profits of U.S. multinationals such as IBM, Coca-Cola and Procter & Gamble, but the spending power of U.S. consumers is being eroded. In a response to a question about how the Fed has hastened the dollar’s decline, Treasury Secretary Timothy F. Geithner told the Council on Foreign Relations in New York the U.S. is committed to a strong dollar and the U.S. won’t weaken its currency to gain an advantage over its trading partners.

The case for a strong dollar

The U.S. Dollar Index is currently only 5 percent higher than its all-time low from March 2008. But also like 2008, oil and gas prices could soon peak because those higher prices are destroying demand, especially in developing markets. If that happens, the dollar could rally as commodity prices fall. Plus, any hint the Fed will raise rates will boost the dollar. Some analysts believe the Fed will start raising interest rates slowly later this year. Today, many currency fund managers are actively shorting the dollar. But if the dollar starts to recover, those funds short the dollar may be forced to cover their positions and the greenback could rally once again.

Sources

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Every credit limit must be controlled by a ceiling, a line that is drawn in the financial sand. As the new fiscal year began for the U.S. on October 1, 2009, there was a bit more than a $200 billion dollar cushion between the debts the country owed and the credit limit that had been imposed by lawmakers.

The U.S. Treasury Department continues to scurry for debt relief, trying to sell of debts. The self-imposed debt ceiling is $12.104 trillion dollars, and at this rate it is presumed that the debt will go through the roof by December.

Raising The Roof

The only problem with a self-imposed credit limit is that you can self-impose a new one. It is presumed, quite realistically, that U.S. lawmakers will do just that. Over the last seven decades, lawmakers have raised the debt ceiling on numerous occasions, 90 to be exact.

They have taken that path eight times in the past seven years. It is believed that they have no alternative but to do so, for the inevitable conclusion would result in a government shut down. As scary as that may sound, it actually occurred briefly as recently as 1995, and the country survived.

Exploring the Options

The lawmakers will certainly approve the raising of the debt ceiling to avoid any financial insecurity for those around the globe who invest heavily in U.S. stability. The absence of a renewed credit limit would lead to the decline in the credibility of U.S. Bonds, imposing financial instability for many. The ideal situation would be for the lawmakers to impose this credit limit prior to that line in the sand being crossed.

If an agreement cannot be reached prior to the debt going through the roof, the country does have some short-term options. These actions will ultimately buy only a short time frame of mobility. There are a few funds the government can tap for financial relief. One would be the 401K fund for federal employees that contains $113 billion. The Civil Service Retirement and Disability Fund offers the opportunity to borrow up to $3 billion a month but of course any money obtained from either of these resources would have to be replenished with additional interest.

The Future

The government does have options for short-term relief, but in the end a more responsible alternative must be achieved than raising the ceiling every few years. It is very possible that over the next decade the national debt will expand an additional $10 trillion dollars if the government proceeds with the existing agenda. U.S. lawmakers are faced with implementing a different course of action that will curve the looming debt cycle or be prepared to drift inevitably into an uncertain financial future.