The American Spectator

This is not what many had hoped. Conventional wisdom argued that a single European currency would force countries to move toward lower tax rates and freer capital markets. Now, some are suggesting that the failure of the constitutional votes will lead to a collapse of the euro system, and with it the pressures on the whining socialists in Europe to reform. I am not willing to go so far. Eventually, even Old Europe will be forced to change, but it won’t happen fast. I suspect the euro will survive and that New Europe will continue to lead the way.

ALL OF THIS BEGS A QUESTION: Why was the dollar so weak in the early 2000s? Because the U.S. economy was weak, or somehow unstable? Or was it that consumers and government were spending beyond their means? None of the above is the answer.

The U.S. dollar was weak as a result of an excessively accommodative monetary policy. The Fed cut the federal funds rate eleven times in 2001 and pushed it down to 1 percent by 2003. And despite a series of rate hikes, the federal funds rate has been below inflation for over two years — the longest period since the mid-1970s.

In order to hold interest rates below inflation, the Fed has forced liquidity into the economy to such an extent that it caused a drop in the value of the dollar. As in any other market, supply and demand are the dominant forces affecting the value of the dollar. The Fed has supplied more dollars than the world demanded, and the dollar dropped.

Now that the Fed is boosting interest rates, monetary policy is slowly moving back toward neutral. As this occurs the dollar will strengthen. A strong U.S. economy will help this adjustment process as well.

Being short, the dollar in this environment is not a great investment strategy. Warren Buffett should just say “non.” The French already have.