The Exchange Rate Could Get Worse

RawAlex · 2006-05-12, 05:10 PM

DJilla, actually the price of gold and the dow 11,000 are a match for the low US dollar, as both have ties to the exchange rate. You get back into equivilancies and such... let me explain:

As the US dollar drops, all things priced in US dollars in theory should start to cost more because their initial currency is going up compared to the greenback. What you bought from europe for $100US 2 years ago now costs you $135 or so. On that adjustment along, gold went from $400 to $540 or so... so the increase in value of gold is only from $540 to $745... still a huge jump, but not as much as it appears because the currecy shift is fudging the values as expressed in US dollars.

The high dow is about as easy to explain. When US companies do business overseas right now and make a profit, that profit is exaggerated when it is converted to US dollars. 5 years ago it would have taken 1.2 or 1.3 million euros to make a 1 million dollar profit on european operations. Now that same 1.2 million Euros makes almost 1.68 million profit for the US company, a bottom line improvement of 68% without a single change in the company's situation. These improved results ripple through the companies, which show nice profits... but in many cases, they are exchange rate gains and not actual improvements in operations.

For the US government, the upside of this is increased tax revenue from these boosted profits, which helps to offset the massive losses from exchange rate drops.

It is a weird old situation, that is for sure.

Alex

2006-05-12, 05:10 PM	#1
RawAlex Took the hint. Join Date: Mar 2003 Posts: 5,597	DJilla, actually the price of gold and the dow 11,000 are a match for the low US dollar, as both have ties to the exchange rate. You get back into equivilancies and such... let me explain: As the US dollar drops, all things priced in US dollars in theory should start to cost more because their initial currency is going up compared to the greenback. What you bought from europe for $100US 2 years ago now costs you $135 or so. On that adjustment along, gold went from $400 to $540 or so... so the increase in value of gold is only from $540 to $745... still a huge jump, but not as much as it appears because the currecy shift is fudging the values as expressed in US dollars. The high dow is about as easy to explain. When US companies do business overseas right now and make a profit, that profit is exaggerated when it is converted to US dollars. 5 years ago it would have taken 1.2 or 1.3 million euros to make a 1 million dollar profit on european operations. Now that same 1.2 million Euros makes almost 1.68 million profit for the US company, a bottom line improvement of 68% without a single change in the company's situation. These improved results ripple through the companies, which show nice profits... but in many cases, they are exchange rate gains and not actual improvements in operations. For the US government, the upside of this is increased tax revenue from these boosted profits, which helps to offset the massive losses from exchange rate drops. It is a weird old situation, that is for sure. Alex