My colleague Frank Esposito's column Plastics demand Rx for resin headaches highlighted a few important facts: 1) resin price spikes, 2) weaker dollar, and 3) increased exports to Asia. He rightly attributed the growing exports to the weaker dollar. And I'm here drawing an additional line between the resin price hikes and the weaker dollar.
Yes, if you are looking for something to blame for the resin prices, don't forget the greenback.Fundamentally, the depreciating dollar has fueled oil and natural gas prices, which impacts the production cost of derivative plastic materials. As former Federal Reserve economist David T. King pointed out in a Wall Street Journal article: "The collapse of the dollar exchange rate, alone, explains at least half of the increase in the pump price of gas over the past five years." Of course, the other half would be the supply/demand relationship. Detailed economic analysis is available is King's column. From another perspective, based on the principles of nominal prices and relative prices, internationally traded commodities like plastic resin must reflect the value of the currency that stipulates the prices. When the dollar falls, prices -- including benchmark gold and commodities -- go up.SEARCH
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Blame US$ for resin prices
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COMMENTS (3)
Bharath Srinivasan:
Why not, look at the Greenback itself as a commodity, with the US having exclusive rights to manufacture? The cost of manufacture of US $ 100 bill is a very small compared to the actual value of the bill. This bill can be exported, after all, when China buys oil from Angola, there is a demand for the greenback, though US is totally unconnected in this transaction. What are the risks afterall, if US develops fresh dollar issue as a business? The risk for US would be the inflation within the US if currency circulation is high (too much money chasing too few goods). This is not going to be because the bill is going to be used to make payments outside US and will finally land in US Treasury as bonds (which can be controlled). Secondly, the bond has to be serviced. Isn't the the profit made in making the US Dollar (Value of the USD bill - cost of making it) be used to service the bond cost? I had read an article that the increase in greenback circulation between 1946 (Bretten Woods agreement) & 1973 (Nixon's decree) was around 70%, but the number is over 2000% between 1973 & today.
Some point out the positive effect of high commodity prices on Dollar. The demand for dollar increases and supports it though the traditional economic currency support mechanism through stronger US economy and higher val-add withing the economy is not there.
US, some say, is in an enviable position. Rest of the World economies which have worked hard to progress thus far, unfortunately finds most of the value addition they have done within the country locked up in USD. Without much thought, they have also invested them in US Bonds. Now, it is in their interest they protect the value of the dollar (and their investments).
As you have mentioned in the article, commodity prices have been rising due to the weakness in the dollar. This again is a problem for the rest of the world. It is causing intense political situations (South Korea, Malaysia, Indonesia, India, UK and so on). The best solution in sight, support the US Dollar.
So, many Central Banks are working towards one goal - SUPPORT THE DOLLAR.
Nina:
Well said, Bharath.
The Chinese government, along with many other emerging economies, are stuck with massive amount of US dollars in their foreign currency reserves and watching the value drop day after day. They should have instead stocked up on gold and maybe oil...
And how do you think other countries can "support the dollar" if the U.S. is determined to further depreciate its currency?
Bharath Srinivasan:
Hi Nina,
Central Bank role can be in two ways -
1. Contolling the interest rates within the country to match interest rates in US despite inflationary pressures within their country. Look at ECB actions for sometime.
2. Scavenging the dollars in their market to support it.
Additionally, any activity that could lead to depreciation of US Dollar would be argued out of implementation for supporting the dollar.
For example:
Iraninan Oil Bourse (IOB) to move on to Euro based or Iranian currency was delayed and put off. I feel a lot of arguments to convince Iran would have pointed out the fate of Iranian dollar assets should the dollar plummets. The result - IOB which was ready to start trading in Euro in March has been deferred indefinitely and they started trade only in Iraninan rials.