Strong dollar, weak U.S. coin sales

As most of you have probably heard, the U.S. Dollar Index is now at its highest levels since September 2003. In theory, this is an index of the value of the U.S. dollar against a market basket of foreign currencies. However, most people are not aware that it is primarily an index to the euro and that the total basket only includes six foreign currencies.

The components of the index consist of the value of the U.S. dollar against the euro (57.6 percent of the total index), Japan yen (13.6 percent), British pound (11.9 percent), Canada dollar (9.1 percent), Sweden krona (4.2 percent), and Switzerland franc (3.6 percent). It does not include the relative value of the dollar against any other currency such as the China yuan.

Obviously, the U.S. Dollar Index does not accurately portray the strength of the U.S. dollar against all global currencies, especially on a trade weighted basis. Still, it is one bit of data that is closely tracked by investors worldwide.

The current strength of the U.S. dollar doesn’t really have anything to do with the U.S. dollar being strong. Rather, it is a reflection of the efforts by other nations to devalue their currencies. As of last count, the European Central Bank and the central banks in Australia, Canada, Denmark, India, Japan, and (as of last Wednesday), Singapore have formally committed to driving down the value of their currencies. There are probably other central banks that are knocking down their currencies but not publicizing this policy.

The relative strength of the U.S. dollar has some good features that benefit Americans. It means that imported goods cost less.It makes it less expensive for foreign travel. It also means the U.S. government can get away with paying a lower interest rate on its debt.

Unfortunately, a strong U.S. dollar also carries a number of negatives. The prices of American goods and services become more expensive in the currencies of other nations, which discourages international demand. It discourages foreign tourists from visiting America. Many American companies derive substantial sales and income from foreign operations, which decline as other currencies fall against the U.S. dollar (see the Microsoft and Caterpillar quarterly reports this past week). It also signifies major global concerns about the strength of worldwide economies.

At the end of 2013, the interest rate paid by the U.S. government on 10-year Treasury debt was 3.03 percent. At the end of 2014, it was down to 2.173 percent. Last Friday it fell all the way down to 1.679 percent.

In total, foreign central banks and investors have been reducing their holdings of U.S. Treasury debt. The lower interest rates are, therefore, a result of high demand for U.S. Treasury debt from American investors, banks and the Federal Reserve. As of the beginning of January, new federal government regulations prohibit large U.S. banks from treating their municipal bond holdings as high quality liquid assets in judging whether such banks are adequately protected from possible bank runs. Consequently, this one regulation could drive up the demand for and the value (effectively lowering the interest rate) of U.S. Treasury debt at the same time that it has the opposite effect on municipal bonds.

A scary thought is that the U.S. government is trying to pretend that the American economy is recovering. If it really was, there should be strong demand from the private sector to expand by borrowing funds at higher interest rates than paid by the U.S. Treasury. That this is not what is happening is a sign that investors perceive either a high degree of uncertainty about America’s economy growing, or certainty that there is no growth. For the year 2014, for instance, the United States ended a multi-year run as the world’s top destination for foreign direct investment. In 2014, it came in a distant second to China.

For the sake of the U.S. government, it needs a strong dollar to minimize the interest rate on its debt. On the opposite side, to the extent that a strong dollar hurts the American private sector, there will be lower tax collections by the government.

What does a strong U.S. dollar mean to collectors of rare coins and paper money in particular? It means that there is lower foreign demand for U.S. numismatic items, while there is a greater likelihood that Americans will be more inclined to purchase “bargain-priced” foreign coins and paper money.

The strength in the U.S. dollar could also indicate coming weakness in the U.S. economy. Should this come to pass, as I anticipate, that will reduce demand for discretionary purchases, such as for hobbies. Numismatists need to keep an eye on international currencies to track what is likely to affect the values of their collection, or items that they are looking to purchase.

Patrick A. Heller was the American Numismatic Association 2012 Harry Forman Numismatic Dealer of the Year Award winner. He is the owner emeritus and communications officer of Liberty Coin Service in Lansing, Mich., and writes “Liberty’s Outlook,” a monthly newsletter on rare coins and precious metals subjects. Past newsletter issues can be viewed at http://www.libertycoinservice.com. Other commentaries are available at Coin Week (http://www.coinweek.com and http://www.coininfo.com). He also writes a bi-monthly column on collectibles for “The Greater Lansing Business Monthly” (http://www.lansingbusinessmonthly.com/articles/department-columns). His Numismatic Literary Guild award-winning radio show “Things You ‘Know’ That Just Aren’t So, And Important News You Need To Know” can be heard at 8:45 a.m. Wednesday and Friday mornings on 1320-AM WILS in Lansing (which streams live and becomes part of the audio and text archives posted at http://www.1320wils.com).