Some people are worried about the effect of the U.S. economy and the policy responses to it. They worry that the dollar will plummet in value as global investors pull money out of the U.S. economy and decline to invest in U.S. Treasury bonds, the method by which the U.S. government finances annual budget deficits (and refinances older bonds). This worry is not justified. The dynamic described is not happening in any form or fashion.

 

And yes, the dollar is dropping in value... lately. Alan Blinder wrote an article months ago that was blogged about here and was contrarian at the time about how slightly rising interest rates indicated not that investors were skittish about buying U.S. debt, but that investors were beginning to see prospects of economic growth, thereby raising the expected yield.

 

Now from The LA Times, we see how investors also are getting comfortable about recovery prospects in general, which is leading them to take on riskier global investments using money they had stashed in the U.S. for safety. So the dollar is not plunging, rather global investors are seeing brighter days ahead. The data suggest that "smart money" sees recovery prospects in the near future and are shuffling their investment portfolios. This is a hearty dynamic and one that is welcome. The dollar is not plunging. It will not plunge.

 

From the article:

For one, investors worldwide are feeling better about the global economy, which is pulling money out of the classic hiding place of the dollar in favor of riskier assets, including emerging-market stocks.

 

"A lot of money is coming out of safe-haven dollar bets," said Michael Woolfolk, senior currency strategist at Bank of New York Mellon.

 

Investors and traders also are reacting normally to the interest rate differential between the U.S. and other countries: With U.S. short-term interest rates lower than those of most other nations, and the Federal Reserve in no hurry to raise them, the dollar naturally is at a disadvantage to currencies in countries with higher rates.

As I often say, partisan views and economic data do not mix. It's like drinking and driving. The meaning of the data is best revealed by how investors vote with their actions. This is a key understanding of successful investors.