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by Louis Basenese, Advisory Panelist
Senior Analyst, The Oxford Club
Wednesday, June 17, 2009: Issue #1020
Two weeks ago, at a financial conference, a member of the audience asked an all too familiar question, “What’s your view on the U.S. dollar?”
Long-time readers know I never shy away from this topic.
In fact, last year, when everyone else believed the world’s reserve currency was about to be usurped by the euro, I predicted it would rally and we would see the end of the weak dollar. And rally it did. After the impressive move, of course, I changed my stance on the falling dollar.
And since that time I’ve only become more convinced the U.S. dollar is doomed to lose value over the long term. Here’s why we need a weak dollar…
Why We Need A Weak Dollar: A Dramatic Shift in Power
One of the first reasons why we need a weak dollar is that we are witnessing a dramatic shift in the balance of power. For decades, the U.S. dollar garnered strength from our big spending ways. After all, we were the world’s largest economy and the buyers of last resort. But now we’re getting serious competition from emerging economies.
“The emerging world is not just a source of supply [anymore] but also a source of demand,” says Robert Sinche, head of strategy for currencies, global rates and commodities for Bank of America.
For instance, Brazil, Russia, India and China alone now account for 15% of global GDP, up from 8.7% in 2004.
As time elapses, the relative size of the U.S. economy will only continue shrinking, bringing its significance and, ultimately, the value of the U.S. dollar down with it.
Second, U.S. policymakers want and actually NEED a weak dollar. It’s the only way to make our goods cheaper to foreign buyers and in turn, start shrinking our massive, and record, current account deficit.
As it stands now, the U.S. budget deficit to GDP ratio rests at 13.1% – one of the highest among G-10 nations and up from 3.2% in 2008. In 2010, it will stay in double-digit territory, around 10% – this all but ensures we’ll keep issuing new Treasury securities, which every investor knows weakens a currency.
The last reason the dollar will falter is because we don’t have any control over it. Our fate lies in foreigner’s hands. With countries like China and Russia particularly, buying so much U.S. debt they can easily influence the value of the dollar.
And it won’t take drastic measures like selling their current holdings or refusing to buy any more Treasuries. All they have to do is stop buying so much of our debt, which recent statements from foreign governments suggests is becoming a strong possibility.
Three Ways to Insulate Your Portfolio From a Dollar Decline
If a long-term dollar decline is imminent, how do we protect our portfolios? One obvious way is to buy an ETF that gives us short exposure. However, I don’t think that’s adequate. We need a more comprehensive approach. I would recommend tactically adjusting your asset allocation to make sure it includes the following:
- Commodities. Real assets will appreciate in value as the dollar weakens. Look no further than the recent rise in oil for proof.
- International companies doing a majority of business outside the United States. Such companies provide a hedge against a weakening dollar, as well as a way to capitalize on the growing significance of international consumers. In other words, they offer us two ways to profit.
- U.S. companies doing significant amounts of business overseas. By focusing on U.S. companies with at least 25% of business overseas, we can diminish the impact of a weak dollar. As the U.S. dollar falls in value these foreign profits will become more valuable.
In the end, I’m not about to join the camp of pundits proclaiming the U.S. dollar will lose its status as the world’s reserve currency. That’s not going to happen, just like a prisoner with a life sentence is never going to get out of jail. There are just no alternatives.
That being said, I am convinced the dollar will struggle mightily in the years ahead while we try to rid ourselves of a crushing deficit and emerging economies become even bigger consumers. So make sure you invest accordingly.
Good investing,
Louis Basenese
- The Biggest Threat to America’s Relationship With China
- How to Play Rising Foreign Stocks and a Rising Dollar
- The End Of The Weak Dollar: Top 10 Reasons the Greenback’s Finally Headed Higher
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11 Responses to “Why We Need A Weak Dollar”
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A former Wall Street consultant and analyst, Louis helped direct over $1 billion in institutional capital before joining forces with The Oxford Club.
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June 17th, 2009 at 5:36 am
The fact that foreigners own so many US dollars gives them an incentive to prop up the US dollar. In so doing, they reduce the damage to the value of their US dollar investment.
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June 17th, 2009 at 5:52 am
Sadly, I believe the dollar is doomed. We, as a nation are too far down the slippery slope to turn back. What is the morality of paying off debts with cheaper dollars? Is it different from stealing?
p.s. I used to work with a man named Clayton Guth. Is Julia Guth a relative?
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June 17th, 2009 at 6:11 am
I would like to learn What is INVESTMENT U.
I hope your guide.
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June 17th, 2009 at 9:58 am
A weaker dollar is also a way of paying (repudiating) our debt. What is the alternative?
Are we actually going to pay back what we owe?
I doubt it.
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June 17th, 2009 at 10:45 am
This letter today — and your comments re. the dollar — make a lot of sense — thank you.
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June 17th, 2009 at 10:55 am
Your simile: “like a prisoner with a life sentence” is poignant. I heard Fred Angel of the Treasury say that he would do anything to maintain the dollar’s status. A man in prison still clings to the bars in hope.
Thank you,
RLL
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June 17th, 2009 at 11:42 am
GOOD ARTICLE,BUT HOW DO WE INVEST IN COMMODITIES.
THROUGH ETF’S OR HARD HANDS ON REAL COMMODITIES.
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June 18th, 2009 at 5:04 am
As per your view if US $ loses its weight or when it weakens compare to most of the currencies,do you expect the international gold price which has a negative corelation with US $ will go up from this level.
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June 18th, 2009 at 6:22 pm
The Dollar has been weak for several years now, since 2002 it has plunged against most major currencies. Although declining in value, I don’t think its doomed. Its not the end of the world but more of an era. International economies are expanding impressively relative to the US. I live overseas and have noticed that the standard of living in the country where I reserve is about on par with the USA.
A “doomed” dollar though would be an ominous sign for the USA as a whole since its a unit of our nation’s wealth and buying power, and relative to the rest of the world that buying power has diminished considerably. I still think “Doomed” is a bit too strong maybe losing its shine more than anything.
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June 21st, 2009 at 12:10 pm
The dollar is doomed – the only question is when the broad populace will see it. I was laughed at when I predicted 1.50 vs the Euro – how could the all powerful nation with the most nukes ever slip to $1.50? OK, next target is $2.00.
Regarding the question about the intenational gold price – I don’t see it move very far for a while. In fact, I see gold falling first. You can’t eat gold; it is a safety valve only in normal recessions – this one ain’t normal. In fact, it is a depression in its childhood.
The dollar problem goes very deep – the dollar has lost app. 94% of its value since the inception of the Fed. Devalution (= inflation) is built into the system as a way of stiffing stupid investors.
The question about how to invest in commodites is a good one. I don’t know whether I’ll be right, but I am inclined to buy foreign producers, e.g. Canadian mines from potash to oil. This way you particpate in commodities but also protect your money.
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June 22nd, 2009 at 8:14 am
What backs up the US dollar are US goods and there are plenty/endless choices. Thus holders of US dollars can cash in their holdings by purchasing US products.
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