The Weakening Dollar – I
There’s been a lot of talk regardimg the weakening US dollar and its effect on your wealth. Many people believe it can’t last and the dollar will rebound. Others think that it still has more room to fall.
I personally think that it will continue to fall so long as the government does nothing to stop the reasons for the weakness. Here’s a good explanation by Mark Hutchinson.
The U.S. greenback will remain generally weak for two key reasons:
* First, the United States is still running a $700 billion balance-of-payments deficit with the rest of the world. Asian central banks have been financing this by buying U.S. Treasury bonds. As we now also know, German regional banks have also been financing it by buying subprime mortgage debt. [It’s particularly good for the balance-of-payments ledger when foreigners buy subprime mortgage debt, helium-filled dot-com stocks, or the Brooklyn Bridge, because the profit that domestic shysters make from selling worthless assets to foreigners counts as income.] Nevertheless, both these once-favorable trends are showing signs of ending. This means the United States has to export more, which means the dollar must drop still more against the euro, sterling, yen, renminbi and the currency of anyone else that might be persuaded to buy U.S. products if they’re cheap enough.
* Second, the dollar will remain weak and probably get weaker – at least in the short run – because U.S. Federal Reserve Chairman Ben S. Bernanke has twice recently cut short-term interest rates: a half-percentage point [from 5.25% to 4.75%] on Sept. 18, and a quarter point [from 4.75% to 4.50%] on Oct. 31. Since the Bank of England, the European Central Bank and the Bank of Japan are all closer to raising interest rates than reducing them, Fed rate cuts make the even less attractive by comparison. And many analysts see additional rate reductions to come.
So assuming you agree that this trend is likely to continue, how have you positioned yourself to either hedge against or profit from this?
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November 30th, 2007 at 12:53 am
Weakening USD seems to be just an inconvenience for USD-based investor but for, say, EUR-based investor it’s a menace. Most freely available stock information (price ratios, screening, etc.) is only available for US traded stocks. So you have to solve a trade-off whether to buy easily screenable US stocks and have most of your gains eaten by exchange rate changes or you have to do the harder work of finding non-USD based investments. The currency of my coutry (CZK) is one of the most strenghtening in the world which together with lack of investing possibilities in CZK creates a real investing nightmare. I can even possibly be better off by putting all of my money to the money market account than investing in US stocks. My wife spend the summer of 2001 in the USA when the exchange rate of CZK/USD was about 40 (one greenback for 40 CZK). Today the rate is below 18. So I’m currently seeking GBP and EUR based investments alongside with non-USD tied ADRs (because eg. electronics suppliers may be based in Taiwan but they trade their goods in USD). Nevertheless I’m still losing ~5% a year versus EUR just due to the changing exchange rate.
A USD-based passive investor could probably profit from buying Euro Stoxx, DAX or MDAX-based total return (dividends reinvested) ETF index fund. It’s not too widely discussed but Germany’s economy is similar in size to China and it is a developed market meaning a relatively safe investment comparable to S&P 500 or DJIA (and no long-term problems like in Japan).
But hey, USD can also stop weakening any time because nobody can know the future, right?
December 1st, 2007 at 11:46 am
while one cannot predict the future, you can get an idea from what has happened in the past.
the fed will continue to drop rates through 2008. this will likely keep the greenback weak.
for non-US investors, the scenario is indeed difficult. your wife’s vacation would now have cost half as much as it the last time. I guess it’s time to take some time off and travel the USA!!!