Dollar Redux
by Richard
Further proof that no trend lasts forever.
Our down-and-out dollar is starting to rebound. Earlier this year the Euro hit $1.60 and is now below $1.50. The dollar has also strengthened against the Yen and Pound.
Currency Monitoring
Just as you scan the stock indexes daily, you should also get in the habit of monitoring the dollar. A good place to start is page 4 of the daily Money and Investing section of the Wall Street Journal, under the heading “Commodities and Currencies”.
In fact, Morningstar has just recently broken out Currency Funds as a distinct asset class, and now tracks the category on its own. Within the ranks are funds that bet on both the strengthening and weakening dollar, as well as long currency positions in hard currencies such as the Swiss Franc.
Not to mention the avalanche of ETFs (exchange traded funds) that allow you bet for or against the major currencies.
I’ve always felt that you are in the mainstream of currency hedging by the simple expedient of having a globally diversified portfolio, and more to the point, I don’t have any confidence in my ability to project currency trends.
Reallocate that Portfolio
My sense of the recent turnaround is that it is not so much a vote of confidence in our tapped out economy as a recognition of how widespread the economic slowdown has become.
In the land of the blind, the one eyed man is indeed the king.
In retrospect, you can see that the strong dollar helped prop up our global dominance in the nineties, just as the tanking dollar helped to mark up the returns on foreign equities for most of this decade.
Which means that the relative return of foreign vs. domestic stocks has now reversed, and the allocation that worked for you in 2007 is now as unfashionable as your old bell bottoms and disco shirts from the seventies.
The practical implications are profound. We will not have so many foreign buyers of our overhanging real estate inventory if the dollar continues to outperform. Our export oriented companies will have to row against the current…a complete reversal from the boost they got from the declining dollar.
How Currency Flux Affects Oil Prices
For most of us in our day to day lives, the biggest change we will notice is in the cost of energy, a dollar denominated asset class for the most part.
Much of what we experienced in the rapid increase in energy prices was the doubly whammy that came from global demand and the weak dollar.
Which goes to prove that market excesses have a way of wringing themselves out if the market is allowed to sort out the winners and plunder the losers.
And the Political Fallout
Our brain-dead Congress has declared war on energy speculators…who have been guilty of the sin of price discovery and providing liquidity in a treacherous market.
While the traders who kept rolling over their positions and were long on energy have been decimated these past few weeks.
And so we come to the first theorem of political economy: After the battle, the first order of business is to go out on the battlefield and shoot the wounded.
