StreetTalk: Weak Dollar Could Give Foreign Biopharms a Boost — but Hold US Firms in Check

The decline of the US dollar could affect the US economy in a dramatic way
Mar 01, 2005
Volume 18, Issue 3

Brian O'Connell
I've heard that economics forecasting is an occupation that gives astrology respectability. But even economists are right to lament the direction of the US dollar. Although it has stabilized of late, the dollar's performance over the past few years has been sorry, indeed. The ramifications of said performance could be huge for American industry - including the biopharm market, which must fend off more overseas competitors than most industries.

Yes, I know. The US dollar is the most widely held financial asset in the world. But it is also the most dangerously overvalued asset in the world — and one of the worst performing.

We've seen the bottom dropping out of the US currency for more than a year now. In late 2004, the dollar hit an all-time low against the euro. It dropped 36 percent from its high four years ago and is down a whopping 93 percent in the last 61 years. As a result, the US current account deficit — the broadest measure of foreign trade — has risen to nearly $600 billion, or around six percent of gross domestic product, as Americans buy more from overseas than US businesses can export. Questionable decisions on interest rates from the Federal Reserve, record high oil prices, and the uncertainty over the war in Iraq has sent the dollar on a downward spiral.

FOREIGN INTERVENTION KEEPING DOLLAR AFLOAT Worse, the US dollar is no longer backed by gold or silver or anything else for that matter. The only thing backing it today is the "full faith and credit" of the US government.

The trouble is that the US government now has over $7.4 trillion in outstanding debt ... trillions more in "off-balance sheet" obligations (like Social Security and Medicare) ... and it's adding to its unproductive debt at the rate of more than $1 billion a day.

At the same time, foreign central banks and investors have kept the dollar afloat over the last few years. Foreign governments like China and South Korea have purchased nearly a quarter of our national debt. But our latest indicators show that overseas investors are beginning to offload US government bonds.

As foreigners see a US twin deficit (fiscal and trade) climbing over the $1 trillion mark a year, and national debt on track to hit $10 trillion in the next two years, their appetite for dollars (and dollar debt) seems to be abating. And this is placing a groaning burden on the dollar.

The next major down leg of the dollar, in fact, has already begun. In the last three years, dating back from December 30, 2004, it's down 32 percent against the euro, 25 percent against the pound, 33 percent against the Swiss franc, and 23 percent, 34 percent, and 44 percent against the Canadian, Australian, and New Zealand dollars.

But if you still think this is only a concern for currency traders and tour operators, think again:

  • Dollar devaluation in the 1930s coincided with the biggest bear market in history.
  • After the US went off the gold standard in the '70s, a 10-year bear market followed.
  • The Crash of '87 was preceded by a 35 percent devaluation of the dollar against major currencies in the previous 18 months.
  • The current fall of the dollar has already coincided with the biggest US stock market crash since 1929.

WHY WORRY? In short, a sustained decline of the US dollar could affect the value of US stocks, bonds, and real estate in a dramatic way. Even in the biopharm market, a weak US dollar could pave the way for higher interest rates (we're already seeing some of that), more expensive research and production borrowing costs, and a real disadvantage for US companies battling their overseas counterparts in this new global economy everyone is talking about.

But it's the stock market that worries me the most. The US stock market, that is.

lorem ipsum