The Dollar and U.S. Pork Prices

     One of the key determinants of the pork industry's tremendous run of profitability has been the relative weakness of the U.S. dollar.  Since 2000, the dollar has lost about 30% of its value with respect to the euro.

      There are several things which determine the value of the dollar with respect to another currency but a few of these account for the bulk of the relationship.  As you can imagine, as these factors change, the relative value of the dollar will also change.  There are "winners and losers" regardless of the value of the dollar as some entities, like pork production in the U.S. benefit from increased export sales in times of low dollar valuation while other businesses and consumers benefit when the dollar is strong.  Imports from most nations (read especially oil) and travel to other nations from the U.S. is relatively expensive at the current time.

     One way to look at the key determinants of currency valuation is by examining all the things which make a country a "good investment" for other countries.  For instance, if inflation is underway or accelerating in a country, especially as it compares to another country, the value of its currency will fall.  In the U.S. there has been an expectation that inflation would occur but this has so far not been realized (partly due to the FED slowly raising interest rates over the last few years).  The expectation of inflation can lower a currency's relative value.

     Another factor is the interest rate.  As the FED lowered U.S. rates after the Sept 11 attacks to stimulate recovery, the value of the U.S. dollar began to fall.  Even though rates have been incrementally inching up for the last few years, other factors have continued to put pressure on the dollar, although you will notice a more or less stable stretch in the graph (since 2004) which coincides with the FED's inching up of US interest rates.

     The balance of trade (especially if there is a "current account deficit") which measures the balance between all payments we make to another country (for imports primarily but also for any debt or interest payments etc.) and all the receipts we gain from them.  If we pay more than we get, we typically incur debt (in the foreign currency) to pay for the balance.  This debt results in a demand for their currency, which raises its price, and lowers the value of the dollar.  The situation is normally self-righting since the change in currency values makes our goods more cheap and they buy more of them thereby reducing the current account deficit.

    A current example of this is how foreigners are helping stabilize the sub-prime mortgage mess in the U.S.  In resort areas especially, like Florida, but also in many other areas, foreigners are buying U.S. homes and condo's because they have become so incredibly cheap compared to the same structures in their own countries.  In doing so, they increase demand in the "over-built" home market and soften the bottom of the real estate value erosion which is tripping more mortgage default wires as it deepens.  Since they must pay in dollars, their demand and purchases are contributing to a strengthening of the real estate market and the U.S. dollar. (though admittedly a small one overall).