Dave Butler, chairman of Global Trader 247, discusses what the weak dollar means for the world economy and especially SA.
"The US dollar has undergone a remarkable period of weakness over the course of the last 12 to 18 months. There have been periodic statements from various US spokespeople saying that there has been no abandonment of the strong dollar policy, however, with the currency having weakened over 30% against the euro over this period, people are finding it difficult to believe these statements - and with good reason; a weaker dollar will help the US economy in a dramatic fashion.
"To understand this, we must go back to the boom markets of the last decade.
"As the US economy boomed throughout the 1990s, the US became a favoured market to invest in. Not only were the markets rallying, but the dollar was strengthening against most currencies, multiplying the gains in US assets to foreign currency based holders of these assets.
"Moreover, with the US economy powering ahead there was a significant danger of inflation, while an aggressive monetary policy was adopted to address this, a stronger dollar also helped maintain low levels of inflation by reducing the price in dollars of imported goods. Without doubt, the administration in the US had the economy very much under control.
"However, with excessive capital spending at the end of the decade and the subsequent bursting of the Internet bubble, we saw the global economy turn around dramatically.
"The (unspoken) policy of a weaker dollar is exactly what the US economy needs right now. Again, the answer is very clear: with monetary policy in the US being so expansionary and with little room to cut rates further, the US economy needs every bit of assistance they can avail of, and a weaker dollar not only improves the balance of payments (foreign goods becoming more expensive hence driving up demand for domestic goods), but also assists in the battle against the dreaded prospect of deflation. Essentially the US is exporting any deflationary fears they have to their main trading partners, and reflating their own economy in the process. So when they say they have not abandoned any strong US dollar policy, don`t believe it.
"So where does that leave the rest of the global economy, and specifically the South African economy?
"As highlighted above with the current US economic policy, we can expect to see solid US growth which will be a significant turnaround. Moreover there is no sign that inflation will rear its head in the short- to medium-term. This should lead to strong commodity prices (as these are generally dollar-based assets, they appear cheaper to non-dollar-based economies).
"The weak dollar will, in the short-term, export deflationary problems to Europe and elsewhere from the US, slowing down any European recovery. With the global economy as slow as it currently is, together with the US exporting any deflationary danger, there is little danger of global inflation, hence interest rates will remain low for the medium-term.
"If the policy-makers in SA can embrace this lower interest rate environment, it could lead to dramatically lower interest rates, the start of which we only began to see recently. Expect medium-term rates to settle around 8% in the next two years.
"As a result of these factors, we can expect to see growth in SA in the region of 4% to 5%. If a stable currency can be maintained then we could see significant opportunities in SA and a powerful economy.
"In conclusion, the weak dollar may indeed be a blessing, not only for the US economy but also for the South African economy."
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