I see the dollar is down again tonight. The Canadian dollar is back over 89 cents US. Practically all the “experts” seem to think the US dollar is headed for a long decline into insignificance. I am not sure this is true, although short-term the trend is certainly down. The consensus view is that the dollar is just fiat paper, of which way too much has been printed. The problems that I have with the “dollar is going to practically nothing” meme are:

1. As the credit bubble collapses, the broad money supply will decline. This means there will be fewer dollars running around.

2. The other currencies are just fiat paper too. They only look good while their countries are running big trade surpluses with the US. As the economy slows, imports will slow as well, reducing the demand for those currencies to pay for them. Energy imports will probably be little affected, as nominal price increases are likely to offset volume declines, but that’s no help for the euro and the pound. It does make me feel OK about being long Canadian dollars, though.

The Economist’s Big Mac index asserts that the Euro and the pound were both about 20% overvalued against the dollar in February, on a PPP basis. Switzerland, Norway, Sweden, Denmark and Iceland are hugely (40-100+%) overvalued. The Canadian dollar was at rough parity, and the yen and Australian dollar were very undervalued. If the drought in Australia doesn’t break this summer (winter in Oz), it could be hard for the Australian currency to strengthen. The yen has its advocates because of its apparent undervaluation, but personally I think the Japanese economy is very fragile. Any weakness in the US will cause a prompt swoon in Japan. Although if I were a currency trader, shorting the Swissie/yen cross might not be a bad idea.

While I’m not exactly a dollar bull, it is not the only ugly sheep in the flock.