After Downing Street
Wed, 2007-12-19 16:48
The Iraq war has affected the personal and political lives of many people around the world, but its influence doesn’t stop there. The Iraq war has had a profound effect on the dollar, too. Here, we’ll take a look at 20 reasons why.
1. Dollar deficit: The Iraq war has been and continues to be very expensive. This makes it difficult, if not impossible, for the federal budget to keep up. As a result, the government is forced to take loans from foreign lenders and print more paper money. As these practices continue, the dollar’s value slips away.
2. Losing market players: As the dollar continues to fall in reaction to budget deficits stemming from the war in Iraq, market players are losing money on their investment. When this happens, the dollar becomes a less attractive vehicle for investment. It is likely that other countries may grow weary of losing as the dollar falls, and will turn to euros for more stability.
3. Avoiding confrontation: In 2006, Syria switched all of its foreign currency transactions from dollars to euros. Perhaps taking notes from Iraq, this move was made to protect them against any confrontation with the US, as US laws require that all dollar transactions have to pass through the US banking system. Iraq made a similar decision in 2000, opting to sell Iraqi oil in euros. Syria’s move to euros is designed to keep their foreign assets safer, avoiding a situation in which they’d be frozen during conflict with the US. The decreased use of the dollar affects demand of it, and thus, the dollar’s value.
4. The domino effect: With Syria jumping ship on the dollar, it’s not a stretch to imagine that others may follow suit. As other countries see the conflict that the US and Iraq are involved in, they may begin to think the same way Syria has, and decide to protect themselves against potential monetary tie-ups with the US. So far, the list of countries who have converted, or are considering converting, to the euro includes North Korea, Venezuela, and Iran.
5. OPEC: Countries aren’t the only ones that could drop the dollar. OPEC has expressed interest in switching to the euro as the standard for oil transactions. This is a major problem, as oil-consuming economies would have to get rid of their dollars, causing a serious drop in both the use and value of the dollar.
6. Overspending: As with any budget, heavy spending in one area means that other areas have to be cut back. With the Iraq war, this spending keeps money out of economy-supporting actions that could help prop up the dollar’s value.
7. Energy shift: Iraq is often pointed to as an example of the problems foreign oil dependence creates. As Americans grow weary of these issues, interest in alternative energy grows as well. With the expansion of these largely domestic industries, the American economy becomes more self-sufficient, a move that is good for closing the gap on the trade deficit and good for the dollar’s value.
8. Interest: Ultimately, the economic trouble caused by Iraq makes it difficult to attract investors. In order to keep the rate of investment stable, the US is forced to attract buyers with higher interest rates, a move that creates inflation and trouble for the dollar. Although in recent months, the Fed has cut rates, this practice is not sustainable.
9. Price of oil: Iraq has lost more than $25 billion in oil revenues. Oil in jeopardy creates energy cost inflation, which creates higher costs for any country that uses oil, a list that the US is most certainly on. Energy cost inflation hurts all currencies, and the dollar in particular.
10. Stock market: At one point, the Iraq war was reported to have cost the US stock market $1.1 trillion. These losses came from consumer goods, airlines, technology companies, and others that depend on discretionary spending. Losses in the stock market do not bode well for the dollar, as a stock market slide creates dollar weakness and could cause a downward spiral of US asset liquidation that puts pressure on the dollar and perepetuates itself.
11. Constant foreign policy debate: As Congress debates the future of the war in Iraq, the dollar looks less and less like a safe bet. Regardless of the outcome, any major policy change in Congress creates nervousness for investors. Of course, that doesn’t mean that outcome doesn’t matter: if investors feel like US policy is headed in the right direction, they feel more comfortable investing in dollar-denominated assets. But generally speaking, investors are wary of a foreign policy and subsequent economy that’s subject to new policies.
12. US contractors: Although the war in Iraq has a generally negative effect on the US economy, it is a boom for major contractors like Halliburton, Lockheed-Martin and Bechtel. As these companies execute government contracting in Iraq, they’re reaping record profits at home, which fuels the economy with jobs and productivity, as well as the success of the dollar.
13. Perception: Just about everything that has to do with dollar support depends upon favorable perception of the US. Unfortunately for the dollar, as the world drops support of the war with Iraq, support of the dollar suffers right along with it. Larry Greenberg of Ried Thunberg & Co. reflects, “It’s hard for me to believe that the flow of capital cannot help but be affected by how the US is perceived around the world.” By going against world opinion, dollar-denominated assets will be devalued.
14. Turmoil and stability: Generally speaking, investors flock towards safe bets. When a country is in turmoil, investors will move away from it and towards countries that show more stability. As the US remains intertwined with Iraq, it chips away at our stability and scares off investors, causing the dollar’s value to drop when they invest in the assets of other currencies, or even sell the dollar-denominated assets they currently have.
15. Military overextension: Spreading our troops out halfway around the world is clearly a costly endeavor. This strains the dollar in a number of ways, ranging from the federal deficit to a loss of quality employees for the workforce.
16. Consumer spending: Fear keeps people from spending, as they’re more likely to hang on to money “just in case” for the future. When consumers don’t spend, however, our economy slows and puts pressure on the dollar.
17. Uncertainty: Conflict in Iraq, or anywhere for that matter, breeds uncertainty in the markets. It creates political change, huge spending, fear of terrorism, and takes attention away from economic positives like corporate profits. This all adds up to an investment attitude that’s more “wait-and-see” than free-flowing, a situation that hurts the dollar.
18. A flood of dollars: In 2004, nearly $12 billion was flown into Iraq, and through various means, was effectively lost. This flood of lost dollars cannot be good for the value of the dollar, as this clearly is a factor in inflation of the currency.
19. Trade deficit: As the price of oil surges in response to the Iraq war, the price of our imports goes sky-high. This creates an even larger gap in our trade deficit, a factor that devalues the dollar.
20. Presidential popularity: Although a direct correlation is debated, the popularity of US presidents is often an indicator for the strength of the dollar. Bush’s popularity has undeniably faltered from the Iraq war, and could spell trouble for the dollar. Ultimately, investors look for a strong, respected US leader when putting their faith in the dollar, and Iraq has tarnished that image for Bush.
It’s clear that the Iraq war is having a negative effect on the dollar. Investors should keep an eye on developments in the future of the war to consider how the dollar will be affected both in the near and long term.
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