kiplinger connection
The Dollar • The Economy • Energy

The Dollar: U.S. profligate imports make dollar weak, our international position strong.
The Economy: Yet Asia’s bolstering of the dollar weakens U.S. long-term strength.
Energy: Laptops getting better, not cheaper.

The Dollar
A dollar rebound is nowhere in sight. Odds are the gradual decline of the currency, particularly against the euro, will continue well into next year and perhaps even longer.
Key factors don't favor the greenback:
Interest rates. They're headed higher in Europe, while the next interest rate move by the Federal Reserve is likely to be a cut. So euros will attract short-term investors.
Economic trends. For the first time in 17 years, economic growth in the euro zone and Japan both could top that in the U.S. this year. This takes some of the shine off the dollar.
History. Despite its five-year slide so far, the buck remains comfortably above lows hit in the mid-1990s. Currency traders see this as a telling signal for continued selling.

A weaker dollar will be mostly positive for U.S. businesses and for the U.S. economy, helping to offset drags from the housing slump and a sluggish pace of business investment.
Exporters are clearly benefiting, notably in medical equipment, IT, vehicles, pharmaceuticals, and chemicals ... all big sellers in Europe. The trade deficit is on a downward path for the first time since 2001.
The chief negative: Higher energy costs, as oil exporters try to keep the price of dollar-denominated crude as high as they can.
Rising import costs will push up inflation, though not by much ... a couple of tenths of a percentage point per year through next year. Foreign firms are less willing to absorb the impact of the lower dollar on their profits to preserve U.S. market share. They're raising prices.

Ongoing dollar weakness DOES pose bigger long-term risks, though. At some point, interest rates will start rising as foreign investors demand higher returns to offset their growing exchange rate losses. Higher rates will slow down economic growth.

But a sudden crash of the dollar isn't likely.
Foreigners aren't about to dump U.S. assets because of a steady greenback decline. Holders of assets, especially in Asia, don’t want to see their Treasury holdings lose value as a result or see their currencies shoot up vs. the dollar, hurting their exports.

The Economy
What would it take to reverse the dollar's fading fortunes? A shift in growth trends in favor of the U.S. wouldn't do it all. In fact, the buck fell in recent years when the U.S. economy flourished.
Ironically, the dollar has to drop faster vs. Asian currencies to set the stage for its future strength. China and other Asian nations are preventing the U.S. currency from losing value at an accelerated pace to preserve competitive advantage in the U.S. and other dollar markets.
This would lead to a swifter decline in the U.S. trade deficit and hence bolster the attractiveness of and confidence in the dollar.
But we don't see this happening. Most importantly, China will stick to a slow appreciation of the yuan, to about 5% a year, fearing that a faster clip would roil China's fragile financial system.
Congress is also easing its currency pressure on Beijing ... dropping efforts to slap Chinese imports with high punitive tariffs. Instead, it will block some multilateral bank financing ... more subtle.

About that bump-up in housing starts in April ... ignore it.
Housing is actually looking worse than it did earlier this year. The dismal 6% plunge in construction permits tells the true story. Builders also see canceled sales on the rise again after a respite that lasted a couple of months. The market still hasn’t found its floor. Odds are that April's climb in starts was only a weather-related blip.

Rental rates probably won't fall a great deal until next year in most parts of the country, despite the growing volume of unsold homes. This year, the demand push ... people opting to rent a house or apartment because they can't afford to buy ... will outweigh the increase in supply. Plus rents ... measured in relation to house prices ... are still readjusting in many places from the meager levels they hit during the housing boom. Speculation distorted housing markets and sent rents artificially low.
The exception: Condo-glutted areas such as Miami and Las Vegas, where rental supplies are expanding at much faster rates than elsewhere.

Energy
Will all Americans soon be paying $4 for a gallon of gasoline?
No, and here’s why: Refiners’ gasoline inventories are recovering from recent production problems. Glitches arose as facilities were pushed to produce both gasoline and newly required ultra-low-sulfur diesel fuel. European refinery problems that cut U.S. imports are nearly solved, too.
After reaching about $3.20 soon, the average price will ease to just below $3 by mid-June, then bob a bit higher around July 4. By Labor Day ... about $2.75, assuming no serious supply disruptions. The price of diesel fuel will ebb, too, after peaking at $3 in late June.
OPEC is doing its part to moderate prices ... shipping more oil to the U.S. than it said it would. The cartel isn’t being magnanimous, but practical. OPEC members worry about the push for alternative energy, knowing that it gains strength every time fossil fuel prices zoom up.
Alt-energy R&D and production are in for a boost from Congress this year, as lawmakers set new goals for ethanol, biodiesel, and more.
Lawmakers want a lot more ethanol blended in with gasoline ... at least 35 billion gallons a year by 2017, up from 7.5 billion a year by 2012 ... a level that may be reached this year. To attain the increase, Congress is counting on new technology to make billions of gallons of ethanol from farm waste, sawdust, and switchgrass ... a tall order.
Congress will also set a goal for biodiesel, mandating the use of 5 billion gallons a year of mostly soybean-derived fuel by 2017.
Another legislative mandate will focus on auto fuel efficiency. By 2020, automakers will have to meet a 40 miles-per-gallon standard for all vehicles, up from 27.5 MPG for cars ... 22.2 MPG for light trucks. Achieving the new target will require greater use of hybrid technology.