The U.S. Dollar’s Dive


In August it took $1.18 to buy a Euro. Today it takes nearly $1.27.  Traders have been warning that $1.26 was a major resistance point. If the dollar fell below this, it has been suggested that the dollar may take a big drop.  The dollar fell below that level late last week.  See the ramifications of this fall on your international bonds, international investing and international business in this October 25, 2004 Gary Scott message.

Jyske bank’s overnight briefing today reports, 

“The US dollar's downtrend has resumed with the currency having fallen out of its nine-month range of 1.1750-1.2465 against the euro. The dollar has been driven weaker by ongoing concerns about the rising US trade deficit, recent Fed comments that have focused on the record US current account imbalance, fears over the outlook for US growth. Friday’s closure was above 1.2660 in EURUSD”

Jyske and other trading advisors have warned that if the dollar were to break below this 1.26 level, the greenback could fall to the lowest price since 1995.

A crashing U.S. Dollar could reduce its world reserve status especially if Asian governments reduce their buying of US government debt.  These governments want a strong dollar so their industries can sell goods manufactured abroad to the U.S.   They have been buying U.S. debt to prop up the dollar.

On must wonder how long this can go on.  Take Japan as an example.  They have been buying US debt for three decades. In the early 70s one US dollar bought 400 yen.   When the Japanese government bought a 100 million US dollar T-Bond paying 3%  (interest rates were low then) it cost 40 billion yen then.   Such bonds double in value about every 24 years so those bonds became worth around 225 million dollars over the 30 years.  But at the new exchange rate of 110 yen per dollar this 225 million only buys 24.75 billion yen.  In yen terms the Japanese lost nearly half their money on the investment even before accounting for inflation!  

If these foreign investors decide to slow down their dollar investing, or even worse reduce dollar holdings, the record trade and budget deficits could push the dollar into a downward free fall.

There are frightening fundamentals weighing the dollar down, unfunded Social Security liabilities, rising unfunded Medicare and Medicaid costs, huge Federal budget deficit, record high and growing trade deficits, declining consumer confidence, poor unemployment numbers, spiraling health care insurance costs, declining leading economic indicators, corporate earnings warnings, outsourcing of U.S. manufacturing, excessive consumer debt, bubbles in financial and real estate assets, record-setting oil prices and now a technical picture that suggests the dollar is on the way down.

Diversifying out of the US dollar is warranted now.

But were should we invest?

In pure currency terms, we have at least seven plays. First we can go into the dollar related currencies in Canada, Australia and New Zealand.

Canada's dollar rose for a fourth straight day versus the U.S. dollar. Canada is a net exporter of crude and record crude oil prices are increasing demand for the CAD.  This is a real,' rather than speculative strength.

Canada's dollar climbed 0.7 percent to 81.60 U.S. cents, its highest since September 1992 and is up 5.8 percent this year, making it the third-best performer among 16 major currencies tracked by Bloomberg. Only the South African rand and New Zealand dollar have performed better.

(You can get more details from Thomas Fischer about the Canadian dollar at FISCHER@jyskebank.dk )

Seeing a strong rand makes us think of a second play which is gold (more on this tomorrow).

The third play is into euro or European currencies. My portfolio is loaded with Australian and New Zealand dollars plus the Pound, Swedish kroner, Norwegian kroner, Danish kroner and euro.  See http://www.garyascott.com/archives/2004/10/06/1093/index.html

A fourth approach is to add some of the potentially weaker European currencies that have a higher interest rate such as the Icelandic dollar, Hungarian forint and Polish Zloty.

Fifth, we have a play on Asian currencies, which pretty much has to come through Asian equities.  There are few Asian currency bonds (the Asians are lending not borrowing).  This has some positive attributes but Asian businesses may suffer if the dollar falls because they export so much to the U.S. and a weaker dollar could reduce their competitiveness.  So a falling dollar can hurt Asian equities as well.

Sixth we can try finding hot business and investing trends such as cocooning (see  http://www.garyascott.com/archives/2004/10/20/1101/index.html  I am in the midst of doing a series on this. More will follow in upcoming messages.

Seventh we can develop our own international business that profits from currency shifts. Take for example one of many business ideas I will cover at my upcoming course in Jefferson, selling a tax lien service outside the U.S. 

If the U.S. dollar falls, inflation will rampage and the dollar interest will rise. Real estate foreclosures will grow. U.S. real estate will grow cheaper in other currency terms.  Tax liens will be ideal investments for overseas investors. Those who have such a business in Asia for example will see expanded opportunity.

We’ll look at another business idea tomorrow known as Green Gold. Few know that this has been one of the biggest US exports to Asia for over two hundred years.  As the dollar falls this valuable commodity will cost less in Asian terms and the value in dollars is likely to rise.

We’ll focus hard this week on ways to protect against a massive dollar slide. Don’t miss a message! Until tomorrow, good investing.

Gary


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