2007 economic forecast: Dollar decline, recession

Economists anticipate that the fall of the U.S. dollar in world currency markets that began in 2006 will accelerate in 2007.

"The dollar could lose as much as 30 percent of its value in 2007," econometrician John Williams, who publishes the website Shadow Government Statistics, told WND. "In 2007, we are likely to see the economic downturn of 2006 develop into a structural recession and yet we have international trade and federal budged deficits careening out of control."

Williams explained, "U.S. interest rates are still relatively low, compared to Europe. This will make it increasingly attractive for central bankers to consider moving foreign exchange reserves out of the dollar."

The dollar, which began January 2006 at 88.86 on the FOREX international currency index ended the year at 83.67, a drop of approximately 6 percent. For the year, the dollar fell approximately 11.5 percent versus the euro, 13.6 percent versus the British pound, and by 7.3 percent versus the Swiss franc.

Bob Chapman, publisher of the economic newsletter The International Forecaster, told WND, "Central bankers in 2007 will begin to move away from the dollar in their foreign reserve holdings."

Chapman's Dec. 30 newsletter documented that the international move away from the dollar has already begun:

China, the second largest holder of U.S. debt, reduced purchases of U.S. bonds 1.7 percent in the first 10 months of the year. Central bankers in Venezuela, Indonesia and the UAE have said they will invest less of their reserves in dollar assets. Iran's switch to euros is the greatest threat yet to dollar supremacy. The usage of the euro is now universal in Iran and it will spread to other Islamic oil-producing countries as well. The share of dollars as a percentage of OPEC foreign reserves has fallen from 67 percent to 65 percent in the first half of 2007.

Iran's decision to hold only Euros may prompt a U.S. decision to launch a pre-emptive attack, Chapman speculated, with the public argument being Iran's pursuit of nuclear weapons in defiance of the U.N. Security Council.

"Saddam Hussein signed his death warrant," Chapman argued, "when he got the U.N. to agree that he could hold his oil-for-food reserves in euros. Ahmadinejad appears determined to go down the same path."

Yet, the Federal Reserve finds itself in a dilemma, Chapman added. "The Fed will make an attempt sometime in 2007 to tighten rates in an effort to make yields more attractive and stem the tide of central banks fleeing the dollar," he told WND, "but that will only expedite the fall of the housing market and quicken the U.S. recession which I believe began nearly 11 months ago, in February 2006."

Williams agrees. "We are going to see a much lower dollar in 2007, especially against the euro, the British pound and the Swiss franc," he said. "[Because of] the underlying fundamentals, such as U.S. economic activity versus European economic activity, the U.S. is struggling. The recession will be increasingly obvious as we proceed through 2007. Even worse, we have an inflationary problem with the higher oil prices over the last two years which are still working themselves into the system."

In contrast, gold surged 23 percent in value last year, climbing to a 26-year high of $732 an ounce on May 12.

Chapman expects the Chinese to take advantage of a strong commodities market in 2007, investing an increasing percentage of their foreign exchange reserves in gold.

"Remember," Chapman said, "all you hear about is the Dow being up 16 percent this year, but you do not hear that gold is up 23 percent. As the dollar continues to decline in 2007, we expect gold to continue increasing in value. Gold in 2007 could easily exceed $780 an ounce."

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