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Historical Look at the Dollar

long-term-dollar-2009-08-161

Yesterday at the Downtown Champaign Art Fair, I had someone ask me about my posts on the dollar. They asked how come I felt so strongly that the dollar would weaken simply because of the debt our country is amassing.

I told them that even though history does not necessarily repeat itself, it certainly can act in a fashion that allows us to forecast things. So, I told them I’d post something on the blog that might help them to visualize what has happened in the past and how the dollar has reacted.

The chart above is a daily look at the dollar from Ronald Reagan to present. I’ve annotated the chart so that the dominant political and economic influences are shown. Please note that none of the annotations are qualitative statements about any particular President but rather just notes detailing what happened during those years.

Also, there may be a tendency to say that the deficits grew because taxes were lowered by President Reagan and have been kept low by all succeeding Presidents. However, the chart below shows that government revenues have been growing steadily since 1960. The deficits and national debt are due to spending more than the revenues collected, they are not due to a shrinking revenue base as some people say.

govt-revenues

You can agree or disagree with each era’s spending priorities and fiscal policies, but as far as the dollar goes, responsible policies like those in the Clinton-Gingrich Era are certainly more conducive to a stronger dollar.

This is how I come to the conclusion that as long as the projections for record budget deficits and national debt come to be a reality, the dollar will be weak. It can rally significantly within the downward trend, and may in fact be doing that as we speak (see the short term chart of the dollar below and note how we bounced off support – the teal line – the other day and rallied up to the downward sloping pint trend line).

short-term-dollar-2009-08-16

So, for now, I am sticking with my negative view of the dollar but I anticipate that a rally is likely which will negatively impact all of the commodity stocks. But, I would not want to get in the way of the major downtrend for core portfolio positions.

Mark