Friday, December 01, 2006  USD Slides, But It's Not All Bad
Yesterday, the dollar hit a 20-month low against the euro and a
14-year low against the pound. Over the past year, it has
dropped 6.7% against a Federal Reserve index of seven major
currencies.  As the graph above shows, the appreciation of the
British pound from about $1.40 to almost $2.00 over the last 4
years (left scale), and the accompanying fall of the USD,
closely follows the increase in the supply of dollars, measured
by M1 (right scale). Supply of dollars goes up, the value of the
dollar goes down, and it takes more dollars to buy a British
pound. Simple. It shoudn't be any surprise that the significant
increase in the US M1 money supply, because of expansionary
monetary policy in 2001-2004 (bringing the Fed Funds target rate
from 6% in 2001 to 1% by 2004), has led to a decline in the
value of the dollar.  A falling dollar might sound bad, but
there are many benefits:  1. Higher stock returns overseas in
dollars, because of the appreciation