International Investments – Why the US Dollar May Fall More

by | Sep 18, 2006 | Archives

International investment have brought me many fortunes in the last 39 years because on May 1971. I was in the Raffles Hotel.

Earlier this month you saw my first passport and learned how I arrived in Hong Kong, May 1968 to begin a career in internationa investments.  Little did I know that just three years later one single event one day would bring me millions in international investment profits over the years.

Here’s a page from that same passport. You can see page one at International_Investments Experience

The passport shows how I entered Singapore on May 5, 1971 with a seven day visa May 12, 1971. Little did I know that this was the week that would change the world as I booked into the Raffles Hotel.

I did not know the history of the US dollar at that time. This is described at below:

“Up until WWII, the British Pound was the dominant world currency by which most currencies were compared. However, during World War II the Nazis undertook a major counterfeiting effort against the British Pound, and thus damaged its standing. In contrast, WWII transformed the U.S. dollar from a failed currency after the Stock Market Crash of 1929 to benchmark currency by which most other international currencies were compared. The U.S. economy was thriving, and the United States emerged as a world economic power. The first element of the Bretton Woods Accord was to peg the U.S. dollar to the price of gold at $35.00 an ounce, using the Gold Standard. With this benchmark anchoring the U.S. dollar, other major currencies were pegged to it and allowed to fluctuate no more than 1% on either side of the set standard. When a currency’s exchange rate would approach the limit on either side of this standard, the respective nation’s Central Bank would intervene to bring the exchange rate back into the accepted range. The Bretton Woods Accord governed currency relationships until the early 1970’s when a floating exchange rate system was adopted See Bretton Woods Accord

The week of May 5 to 12 was the week in the early 70s when this floating system began. explains:

“The U.S. Dollar was labeled ‘the most unstable’ of currencies, as it precipitated the currency debacles of May and August 1971. The devaluation of the U.S. Dollar began on December 18, 1971 through early 1972 and culminated in the global collapse of and heightened capital flight from the American unit, induced by the official burial of the two-tier gold market in November and the quadrupling of oil prices in 1973. Eventually in April 1978, the par value of the U.S. Dollar in terms of gold and SDRs was repealed and the Greenback became a floating Effective Rate.” Read more at Historial Exchange Rate Regime of Asian Countries

There I was enjoying a colonial breakfast in the tropics at its best, outdoor dining under ancient ceiling fans that turned in lazy arcs and coaxed a gentle breeze. Shafts of the morning sun shone on crisp white linen and filtered through the cool morning air. Traveler palms swayed in soft harmony with grackles, katydids. All was gracious and genteel.

In May 1971, The Raffles Hotel offered a great outdoor restaurant just next to the Long Bar. There was something comfortable in the old fashioned pots of thick cut marmalade and slightly burnt toast that stood in racks of sterling silver. This elegant setting and the quiet service was an easy, wonderful way to start the day. I felt in place, relaxed and comfortable, part of an ancient tradition, the modern link in a rite that this hotel had offered for so many generations past. I sat back feeling that all was well. I felt in control and on top of that modern era.

That suddenly changed as I was about to learn a serious lesson about international currencies. I opened the morning Straits Times and the headlines declared “U.S. Dollar Devalues”. That comfortable era had just come to an end. International currencies were in turmoil.

As an American at that time I traveled only with dollars. From centuries past, history had seemingly supported my financial well being up to that very moment. Britain’s colonial days leading to the emergence of America, the World Wars, modern technology, Yankee know-how, puritan work ethics and unbounded natural resources had all worked on my behalf to form the greatest economy recorded time had ever known.

This history had created a world economy vastly dominated by the United States of America. Forces, building before and throughout the twentieth century, lead to incredible economic power within the United States. This domination made the U.S. Dollar the bastion of global currencies and made it the reserve currency of the world.

Yet suddenly when the dollar devalued, money changers would not take the greenback. I couldn’t pay for my hotel. I couldn’t even pay for breakfast and I was 12,000 miles from home. Was I ever scared!

Since that day I have never trusted the US dollar or any other single currency. This has reaped rich rewards. Betting against the US dollar (as I have again and again over these three and a half decades) has been exactly the right thing to do. It has lost about 75% of its value against other major currencies.

Raffles Hotel Where International Currencies began for Gary Scott

Last weekend Thomas Fischer and I talked about this at our International Investing and Business Course. The backdrop was glorious falling golden and red leaves from the Blue Ridge autumn. But our discussion was on why the green may fall with the autumn leaves. We looked at why the US dollar may fall again now. Jyske Bank’s recent foreign exchange commentary says:

Make or break for USD

The crucial thing is the dollar’s fate in the Foreign Exchange Market. Again, this is business as usual. Market participants are clearly divided between two beliefs which tend to move further and further apart, given the scarcity of volatility. On the one side are the imbalance proponents predicting a sweeping and urgently needed weakening of the dollar, and on the other side the dollar enthusiasts who are fed up to the back teeth with hearing about those same imbalances, and who have chosen to believe in the dollar’s status as a reserve currency and hence a safe haven, notwithstanding the fact that the US economy is wallowing in trouble.

Judging by the constant stream of elaborate analyses, many former dollar bears are about to throw up the sponge and turn bullish – seeing that the dollar stubbornly refuses to weaken.

However much they may favor the imbalance theory, many of its staunch supporters find it more difficult to stand firm when former fellow-partisans begin to defect. Doubt whether one’s faith is in fact the right one is a constant nag, and it is very tempting to make an about-turn or to take cover. In other words, market psychology is just right for an eruption of volatility.

For if the G7 manages again to make imbalances the dominant market issue, the deserters will come out in droves to jump on the dollar depreciation bandwagon. On the other hand, if the G7 communiqué is less than firm, the dollar bulls will get a boost, and this will probably make the dollar bears throw up the sponge and side with the dollar.

2004 revisited

History never repeats itself, but it often rhymes
Mark Twain

The period of almost four months that the market has been stuck in humdrum range trading reminds me of the summer/late summer of 2004 and afterwards. Although history will never repeat itself in the same guise, it is no trouble at all to recall a similar development, particularly of the EURO/USD rate. As evident from the below weekly chart of the EURO/USD rate, that period was synonymous with a pause in the dollar weakening which had been prevalent since early 2002 when the EURO/USD rate bottomed out right above 85, and which was obviously provoked by the imbalance problem.

Also during that summer yours truly was an imbalance proponent, which was a doubtful pleasure, exactly as it is today. The imbalance issue seemed hackneyed, and the Fed had just started one of its interest-rate hike cycles (on 30 June 2004).

My opinion is that not only are we in a similar situation to 2004 when the greenback sagged but we are in a similar position of 35 years ago, fighting a hugely expensive war we cannot win, dealing with rising oil prices and close to a US stock market downturn in a long term bear market cycle.

My opinion is that the US dollar will fall more. I do not know when, in a week, a month or a year. My liquid portfolio is almost entirely out of US dollars and positioned so I can wait for the dollar to sag once more. You should check with your financial advisor and see where you stand.

Here is Thomas Fischer at our course last weekend. The distance from the Raffles Hotel to our farm in NC is far. 35 years have passed. But the message then and there – here and now is the same…the US is living beyond its means or borrowed money. This means as then and now the US dollar must fall.

I am no longer inexperienced nor just holding dollars. You probably should not either.

Note the flowers beside Thomas. More on this and how they can earn income for you tomorrow. Don’t miss it!

Until then, good international investments and business.


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