Dollar Mixed After New Low Vs. Euro: What Does it Mean

Yesterday, the Dollar hit an all time low vs. the Euro.

Additionally, the dollar has weakened to the lowest amount against the pound since 1981.

What does this mean if this trend continues?

Basically, it means that foreign investors will demand greater return because the risk of their losing money from foreign exchange fluctuations increases. This means higher interest rates, since the US trade deficit is being supported by foreign investors.

Of particular note would be an increase in oil prices.

Furthermore, this is inflationary, since there is an awful lot that is not made in the US any more, and as the dollar drops, the price of these items go up, which will force the Fed to further raise interest rates.

The increases in inflation will reduce consumer spending power, and a significant downward pressure on house prices, as people purchase based on monthly payment, not price.

Additionally, if oil suppliers get skittish, they may switch to Euro denomination of oil purchases, Venezuela and Iran already have for political reasons, and there will be pressures on foreign national banks to further diversify out of the dollar in order to preserve their reserves.

You notice that it all feeds itself.

Additionally, when one looks at systems like this, the changes tend to be abrupt, and there is significant overshoot, so this can get very ugly in a matter of weeks.