More drops in the dollar

by | Nov 1, 2004 | Archives

If you are interested in international business and international investing read this November 1, 2004 Gary Scott message that shares an analysis of the US dollar from my friend John Mauldin.

The trade weighted dollar fell from around 110 when I wrote in 2002 to 85 early this year and has gone sideways since then. Even with the rather significant drop in the last few weeks, we are only roughly back to where we were in January against the major currencies. One final note, the trade weighted dollar is back to where it was in late 1996 and even 1991.

The Federal Reserve defines the trade weighted dollar as “a weighted average of the foreign exchange value of the U.S. dollar measured against a subset of the broad index currencies that circulate widely outside the country of issue.” What that means is they look at the countries with which we trade and create an index based upon the average of their currencies. The more we trade with a specific currency, the more “weight” it has in the index. That is why the euro can rise 50% and the dollar only fall some 25%. The currencies of Japan, Mexico and Canada are in the index, as well as that of China. The dollar has risen recently against the peso, is flat with China and has not moved all that much in terms of many of our Asian partners. The euro has taken the brunt of the declining dollar.

How High Can the Euro Rise?

The euro was launched January 1, 1999 at 1.21 to the dollar. It “promptly” (over a few years) fell to a low of $0.82. Today it is at $1.27 and change. The British pound and the Swiss franc have traded roughly in concert with the euro. I have been in London, Paris and Geneva this past year. I am amazed at the prices of ordinary items in terms of dollars. I wonder how people can afford to live. $25 to take a family of four to McDonalds? $2 cokes in the stores and $6 cokes in the hotels in Geneva?

Yet, the “locals” don't think much about it. In terms of their currencies, there has been little inflation. Things roughly cost the same as they did a few years ago. While we have seen gold go on a tear in dollar terms, there is no bull market in gold in Europe.

Our trade deficit is far higher than it was almost three years ago when the euro started to rise. Can the euro rise another 50%? I seriously doubt it. Such an imbalance in the world would reap a harvest of trouble.

It could rise another 20% to above $1.50. While a long way from $0.82, in one sense, this would not be far from the value of $1.21 that the European Central Bank originally placed on the euro.

You can learn more about John Mauldin at

So where does one invest if potential in the euro is now limited?

Answers include the higher interest emerging European currencies, such as Polish Zloty. Established euro related currencies such as Danish, Swedish and Norwegian kroner are another alternative as are the other dollars in Australia, Canada and New Zealand. Plus Asian currencies offer a most logical answer. WeÕll look at these options in messages this week.

This weekend we review all these currency opportunities and many more at our international business and investment course. I hope to see you there.