U.S. Dollar Value: Is a Crash Imminent?
By Dr. Steve Sjuggerud, Chairman, Investment U
Tuesday, October 7, 2003: Issue #279
‘The dollar’s overvalued by 100%! The world’s going to hell and it’ll begin with a crash in the dollar’ one analyst will claim, and his analysis might make sense.
‘The dollar’s undervalued,’ says another equally sensible analyst. ‘The U.S. is going to lead the world to greater things, and that will propel the dollar higher’
One guy predicts a crash; another predicts a moon shot Who are we to believe about the U.S. dollar value? The answer: Neither. Because the dollar is only overvalued by 9% when compared to the euro, according to an exhaustive study by UBS research (more on that in a moment).
What does?the U.S. dollar value?mean for us as investors? To me, it means there’s no sense investing outside of the U.S. dollar in euros. The study dispels many common myths (like that about the U.S. dollar’s supposedly massive overvaluation) and it sheds light on a few new opportunities. Let’s take a look at which currencies could do very well, and which ones should weaken
What A $3 Haircut In Karachi Can Teach You About The Buying Power Of Money
Once every three years, the Union Bank of Switzerland (UBS) does an exhaustive survey, ‘Prices and Earnings Around the Globe.’ It’s been doing it since 1970. A full 35,000 data items are collected and analyzed Everything from the price of a haircut in Karachi ($3) to how long a typical Kenyan must work for a Big Mac in Nairobi (185 minutes, versus 10 minutes in Tokyo).
While some currencies are undervalued versus the value of the U.S. dollar, the difference might not be enough to indicate an imminent recovery, or rise in that currency’s value. Take the euro for example
The Euro is 8% Under-Valued Versus the U.S. Dollar
In my mind, this isn’t a big deal. It doesn’t have to correct itself immediately. Currencies fluctuate. They often move from 15% overvalued to 15% undervalued on global sentiment and trend-following, and they can stay out of alignment for long periods of time. By this standard (being 15% out of alignment), the U.S. dollar was undervalued from roughly 1987 to 1999 it was in no hurry to adjust back in line.
So I don’t see the fact that the Euro is 8% undervalued as a trading or investment opportunity. However, opportunities do exist
Where Opportunity Lies in Currencies Against the U.S. Dollar Value
Typically, real opportunity to profit in currencies arises when a currency becomes extremely undervalued – because there’s more room for it to ‘correct’ and gain value, thus creating profits for the currency’s holders. Let’s take a quick look at the value of some major currencies and some at extremes right now, to see if any opportunity falls out
Japan and Norway are an average of 28% overvalued versus the U.S. dollar. This is an extreme. While this doesn’t mean these currencies have to crash (just as the dollar didn’t hurry to rise in the 1990s), chances are these currencies may not be able to strengthen much more from these extreme levels.
On the other hand, South America is the bargain on the globe right now On average the currencies from Brazil and Argentina are currently 55% undervalued versus the U.S. dollar. Emerging countries’ currencies are typically undervalued versus the U.S. dollar value, but this is an extreme. At such an extreme, these currencies may rise in the near term.
China’s currency, a popular story these days, is 23% undervalued, according to the UBS study. The British pound and the Swiss franc are overvalued by about 10% taken together, according to the study.
My Favorite Currency Play
My favorite idea is the ‘Commodity Currency’ idea namely the Commodity Currency Index CD available from www.Everbank.com. You hold four of the cheapest currencies in the world (three of them in first-world countries) AND you collect 4%-plus in interest.
Here are the four countries in the Commodity Index CD, and the percentages they’re undervalued versus the U.S. dollar:
- 17% New Zealand
- 26% Australia
- 13% Canada
- 41% South Africa
You may make 4% a year in interest, plus 10% or more a year in capital appreciation, as these currencies appreciate versus the dollar. Readers of my newsletter, True Wealth, are already up 13% on this since my recommendation in my March 2003 issue. There are likely more gains to come.
The Bottom Line On Currencies
This is the ‘fundamental’ that matters – how far your money goes. And based on it, the world doesn’t look too far out of alignment. There are exceptions in China and in South America on the cheap side and in Norway and Japan on the expensive side.
And while these currencies remain tempting to investors, the most prudent speculation seems to be the ‘Commodity’ currencies, which are undervalued and paying high rates of interest And the easiest way for an American to play it is through the Everbank.com CD.
Good investing,
Steve
Today’s Investment U Cribsheet
- If you have an interest in these things, you can download the entire Union Bank of Switzerland survey for free at: http://www.ubs.com/e/media_overview/media_global/mediareleases/20030819a.html
- For non-currency-related investing that is just as global, international real estate offers some surprisingly sound – yet extremely profitable – opportunities. For example, our sister organization International Living has been investigating real estate in Argentina and has found some intriguing possibilities. To see what they’re up to visit: http://www.internationalliving.com
- Stock Market Predictions: “Crazy” About the Dollar
- Yamana’s (NYSE: AUY) Golden Place to Be
- Jim Rogers is Wrong… The Dollar’s Not Done
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