With the dizzying talk of a “weak dollar,” “crude oil prices,” and “gold rallies,” investors are often left scratching their heads and wondering how all this affects them, and what, if anything, they should be doing about it. As it turns out, these fluctuations are definitely things about which American investors should be aware because they may be affecting our investments more than we ever realized.
What is a Weak Dollar?
When economists use the term “weak dollar,” this means that the dollar is losing value versus foreign currencies. Simply put, it means that the U.S. dollar cannot buy as much foreign currency as it once did. Currently, this is the situation in which the U.S. dollar (nicknamed “the Greenback”) finds itself.
For the past three years, the value of the U.S. dollar has been falling precipitously. Over the past six months, the U.S. Dollar has continued to weaken against major foreign currencies such as the Euro, the British Pound, and the Japanese Yen. The U.S. dollar has even weakened against what would be considered second-tier currencies, such as the Danish Krone, the Iceland Krona, and the Singapore Dollar. It has substantially fallen versus the Australian Dollar, the New Zealand Dollar, and the South African Rand, all three being gold-sensitive currencies.
Many economists have speculated that this weak-dollar environment is likely to continue, partly because President Bush and his economic team might unofficially desire a weak-dollar. The logic is that the president is intent on breaking the back of the trade deficit. Remember that when the U.S. dollar is weak, the dollar buys less overseas, but there is another side of this equation: foreign money goes farther in America. The net effect of this is that the Euro has been so strong versus the dollar that many Irish and other European citizens are hopping on planes to come to America — to shop!
When economists talk about a “currency crisis,” they are referring to the dollar losing value versus its foreign peers so fast that everyone tries to bail out of the currency and replace their American dollar reserves with foreign currency. At least for now, a currency crisis in the United States is unlikely, if for no other reason than major foreign Greenback holders, such as the government of South Korea, will not want to hurt their own investment portfolios. But even though a full-blown crisis is unlikely, investors need to recognize that their investment portfolios might need an overhaul.
Best and Worst Investments
This weak dollar environment has created problems and will continue to cause problems for many American investors. If all your money is invested in U.S. stocks, then all your money is invested in the dollar itself, in a sense, since the underlying investments are dollar-denominated.
Ironically, under this weak-dollar scenario, one of the worst investments would most likely be certificates of deposit (CDs) issued by U.S. banks. American CDs would represent a double-whammy: extremely low-yielding assets denominated in a depreciating currency. The “CD” acronym would be better represented as “constantly depreciating.”
Gold bugs might contend that gold is the best possible investment, yet gold’s recent strength is something of an illusion. On Wall Street, people keep using the term “gold rally,” yet remember, in the light of international currency exchange, everything is relative, gold included. It might surprise you to know that, in the past few years, gold is flat to down versus the Euro; it is about flat versus the Japanese yen; and gold is down versus the Australian dollar. For Americans, gold may turn out to be a good investment, not so much for what it is, but for what it is not—it is not the U.S. dollar.
As an investor, I would be much more interested in buying shares in companies that are non-dollar denominated. You may want to consider investing in carefully chosen foreign stocks, because they may present a financial opportunity. However, as I wrote in this column last month, foreign mutual funds may not be the best solution. Most foreign mutual funds refuse to take into account two things — first, many of them are invested in Asian countries that are linked to the U.S. dollar (China), and second, many of them are invested in European countries whose economies are simply decaying (France and Germany).
The best returns might come from places that Wall Street largely avoids. According to the Asian Wall Street Journal, as of the end of February, Indonesia’s main stock index was up over 41% for the past 52 weeks, South Korea was up over 14%, Singapore up over 12% Australia up over 23%, and New Zealand up 31%. The Philippines’ stock index was up over 13% in the first two months of this year alone. Not only are these markets booming, but factor in the American dollar’s weakness, and American investors could be enjoying some pretty healthy returns.
This environment may continue for some time to come. The dollar’s weakness may represent a stellar opportunity — for Americans wise enough to invest that way.
John Clark is the CEO of Paladin Financial Group. He may be reached at jclark@investprolife.com.
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