The Investment U e-Letter: Issue # 429
Monday, April 18, 2005

U.S. Dollar Forecast: “Still Room for a 20% Rise In the Buck”
By Dr. Steve Sjuggerud, Advisory Panelist, Investment U

Greetings from Zurich, Switzerland – which has to be the world’s most expensive city…

It’s living up to its reputation. The Bar Au Lac hotel is going to run me more than 640 Swiss francs a night. And I scribbled down the prices of what I ate for lunch at the Brasserie Lipp “Salad with Asparagus” (28.50 francs) and “Grilled Beef Filet” (49.50 francs).

In plain English, that means my hotel is over $500 dollars a night and those two lunch selections ended up running over $60 bucks. Ouch!

Wait a minute! Now, before you give me a hard time for spending too much, let me just tell you, this is the way it is in Zurich. I wonder about the U.S. dollar forecast, since the U.S. dollar is worthless here.

While everyone talks of a dollar crash, this trip to Zurich is more evidence that the dollar has already crashed. Europe is outrageously expensive. And some time soon, the exchange rates between Europe and the U.S. will move back in line meaning the euro (and Swiss franc) will fall, and the dollar will rise.

You Can’t Buy Nothin’

Two classic gauges of prices around the world are a cab ride from the airport and high-speed internet access These are not “prized” activities; these are part of everyday international business. And here, yet again, Zurich proves it’s outrageous

Our 10-minute cab ride from the airport to the Bar Au Lac was $50 bucks. Now again, don’t think I’m living high on the hog – this wasn’t some sort of limo or black car service. It was a dingy (for Swiss standards), small, old white European van (if you’ve been in Europe, you know the little vans I’m talking about). Fifty dollars!

And you won’t believe internet service. I pay about $40 bucks a month at home for high-speed Internet. Here in Switzerland, it’s over $40 a day! No joke! Since the city of Zurich is wireless, the hotel doesn’t have wireless access for guests. So I have to pay SwissCom daily for wireless access.

Of course, if you sign up for a week’s access, they’ll give you a discount 200 francs for the week. That’s $167 dollars in a week for high-speed internet!

The U.S. Dollar Forecast: Why the Buck Could Strengthen by 20% or More

I track three primary indicators for currencies

• Interest rates. All things being equal, the country with the higher yields will see its currency rise versus the country with the lower yield (deposits in the U.S. pay nearly 3%, while Swiss ones pay less than 1%).
• Purchasing power. When one developed country’s currency is significantly out of line with another developed country’s currency, it’s like a stretched rubber band – things return to “normal” over time. (A Big Mac in Switzerland, for example, is 82% more expensive than a Big Mac in the States, according to The Economist magazine).
• The underlying trend. Trends in currencies tend to stay in motion for longer than people think. In 2005, the trend in the European currencies has been down versus the dollar, but so far the fall has been minimal and there’s plenty more room on the downside in the euro and the Swiss franc.

Of course, Switzerland is an extreme case. With the exception of the dollar’s massive rise in the mid-1980s, Switzerland has always been more expensive than the U.S. – by about 30%. The currency markets seem to like the stable, conflict-free economy with a solid legal system and a country with significant gold reserves.

Forecasts for the Euro: Overvalued and Struggling

However, the euro area does not include Switzerland. The euro’s big countries are Germany and France, which are struggling much more than the U.S. right now. A few examples:

• Interest rates are lower than the States, at closer to 2%.
• A Big Mac in Europe (for example) is 25% more expensive than the U.S.
• The trend in the euro in 2005 has been down, though the fall has been mild. The ducks are in a row.

Zurich is the most extreme example but Europe is darned expensive, any way you figure it. The rubber band of currency values is stretched to an extreme right now. There’s no good reason a Big Mac is 25% more expensive in euros. A Big Mac will return back to “normal” pricing in euros. And the way that will happen is the expensive euro will lose some of its value.

You may not agree with my U.S. dollar forecast. That’s fine. You don’t have to “buy” the dollar, as I have been recommending this year. But you really ought to think twice about any holdings you might have in euros.

I am here in Europe now, doing the research and I am poorer for doing it, as the U.S. dollar is so unbelievably weak right now. The rubber band will bounce back. It always does.

Good investing,

Steve

Investment U Archives