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The Ailing Dollar May Be A More Dangerous Threat To George Bush Than Saddam Hussein

By Marc Davis, Managing Editor
March, 2003

As the U.S. dollar continues its inexorable slide, the big question on everyone's lips is: 'When will it end?' And that's a question that cannot be answered easily. However, many market pundits think otherwise. They argue that the end of a short-lived war with Iraq will precipitate a revitalized greenback. And that's a simplistic theory that just doesn't hold water. Let's look at the reasons why.

It is primarily the U.S. deficit (albeit in combination with Iraqi war jitters) that has combined to drive the U.S. dollar on a downward trajectory in the last few months. Indeed, major European and Middle Eastern investors are pulling out of the U.S. bond market in droves. That's not a political statement on their part. Rather, it's a cold, rational business decision as they foresee that debt will be used to fund the U.S. war with Iraq. After all, Bush recently lowered tax and can't hike them again to pay for his war. So, he's borrowing money which, in turn, will further stretch the already alarmingly large U.S. deficit. And the ripple effects are already being felt everywhere as investment dollars flow out of the U.S. markets, thereby pushing the Dow Jones back into dangerous territory.

And the triple whammy of a weak dollar, historically high oil prices and a faltering stock market recovery are all combining to hurt the U.S. economic recovery. This has once again led to talk of a possible "double dip" recession - viewed by many as alarmist talk until oil hit $40 a barrel at the end of February. Certainly, the current scenario of oil prices remaining above $35 a barrel is putting a major damper on the tentative global economic recovery. And that impacts the U.S. economy, particularly in terms of demand for U.S. exports (even if the dollar is cheap).

Furthermore, a likely terrorist backlash to war in Iraq will only unsettle the dollar and stock markets further. The only bright note in this scenario is that gold -- the "anti-dollar" -- is rallying strongly, while gold equities ride on its coattails. A weaker U.S. dollar makes the cost of buying gold with the greenback cheaper for European investors. Thus, many foreign investors are dumping their money market U.S. dollars and buying gold, instead. After all, the value of the U.S. dollar is merely based on confidence in the U.S. government and in the nation's financial markets. Conversely, it is worth noting that historically gold has acted as a hedge against political crises and as a reflection of investor pessimism.

And pessimism certainly reigns right now. Even most U.S. corporations are worried about the collateral damage to the U.S. economy from a war with Iraq. Hence, they're now erring on the pessimistic side with their first and second quarter earnings forecasts and their 2003 outlook for investment spending plans. And this situation is obviously reflected in share prices, particularly those of the struggling high tech sector and even Big Board stocks.

So where does this leave the psychological pulse of the financial markets - the venerable Dow Jones Index? Well, most of us thought that the Dow bottomed out on October 09, 2002 when it dipped below 7300 points. Interestingly, that particular day heralded in the 1,000th day of a bear market that began in March 2000 - making it one of the longest bear markets of the last century. So where do we go from here? Chartists argue that since the Dow has now resolutely broken through its winter support level of 8,2000 points, there are no more major support levels left until the Dow approaches 7,300 points again. Indeed, it's the sustained specter of political and economic uncertainty in the markets that's most to blame for robbing the Dow of its upside impetus.

So until the eventual showdown between Saddam Hussein and George Bush takes place, we're unlikely to see the Dow do anything but drift. However, the likely advent of a quick and relatively clinical war will almost certainly breathe new life back into the markets. But the markets are also going to need some help on the domestic front. That involves President Bush getting on with the task of nurturing the U.S. economy and shoring up the dollar. And hopefully, he'll find a way to do just that. Or else he may face the fate of his father. Bush Senior lost his seat of power as a result of being perceived as negligent in his half-hearted efforts to stimulate a recessionary 1991 economy. Of course, he was a little preoccupied with Saddam Hussein at the time. And maybe Hussein may again achieve a victory of sorts by distracting Bush Junior enough to precipitate a "double dip" recession. And that can only mean the prospect of history repeating itself in the form of George W. losing the next election. Hopefully for Bush, he's read some of the great Greek philosopher, Seneca, who once said: 'Understanding the lessons of history helps one to avoid the piercing arrows of irony.'