There has been a temptation on the part of multi currency investors to jump back into the US dollar as it rallied versus the euro.
Having lost 48% versus the euro from June 2001 to June 2008, the dollar rebounded 1% in July and 6% in August and is up over 3% this month.
This is a good correction but without fundamental support. This shift to the greenback is more of a weakening of the euro rather than a strengthening of the dollar. The new dollar strength is founded in European economic weakness and the realization around the world that Europe and the euro are strongly linked linked to the globally important financial and economic role of the dollar.
Another temporary part of the dollar’s strength is simply the covering of loans. The continual fall for seven years of the dollar and America’s expansive monetary policy encouraged multi currency investors to borrow dollars and invest in other currencies. The recent strength of the buck has forced investors to sell other currencies to buy dollars and pay off their loans. This injected added fuel to the dollar strengthening.
Investors have also stopped seeing dollar loans as “no brainer” ways to enhance yields. This reduction of dollar borrowing stomped the brakes on greenback weakness and brought the dollar’s fall to a screeching halt.
During these times of fear US investors have shifted away from less known overseas investments and are investing back at home which also adds to the demand for dollars.
Plus, as strange as this may sound, the US economic slowdown s actually healthy for the dollar. The insatiable American spending has slowed so Americans are spending less abroad at a time when dollar weakness has encouraged the export of US products. This is reducing the US current-account deficit which also reinforces the greenback’s strength.
These factors above are powered by a very sudden ungluing of the global financial system. This has accelerated the US dollar’s correction and perhaps played out these factors quickly.
This means that betting on higher USD parities is taken at great risk. Expect continuing high volatility in the Forex markets for quite some time to come.
Jyske Bank’s forex strategy team recently sent me an interesting note saying:
“Often new trends emerge during strong volatility. The older and the better established a trend has been, the wider the fluctuations – and until now the FX market has very clearly demonstrated that this is so. Thus the heyday of the euro at the expense of the dollar has come to an end this time around.”
So what are the new trends? Here are three I have been betting on.
#1: A return to value. Value investing has long been our philosophy. No reason to change now but other investors have been chasing the easy, fast bucks in rapid appreciation. Look for a shift towards owning high yielding solid boring shares.
#2: Real estate. The real problem investors face is not an economic meltdown. Inflation is the genuine risk because governments have proven that they will flood markets with liquidity to avoid the meltdown. Inflation means that cement will cost more. So too will steel and labor. This means a rise in labor. I salivate when this fundamental meets a global real estate correction and am buying so much real estate I scare myself.
#3: A shift to underlying currency value. Where does an investor go when the euro is no longer trusted and the dollar is fundamentally weak but suddenly flexing muscles it should not have? My guess (and here I am overweighted ) is investors will lean towards currencies of small, economically sane, solid, established, politically sound countries…such as Norway, Sweden and Denmark. If so these currencies will rise versus the euro and dollar. If I am wrong, they are least likely to fall.
All of this brings us to the point of this lesson. If you travel and visit currency and forex trading rooms of large established, successful trading operations, you’ll note that there are very few, old traders. Young men and young women do this job.
Ask yourself why and please let me know what you think. Then we’ll share your thoughts in an upcoming lesson.
Until next lesson, good global investing to you.
Thomas Fischer of Jyske Bank, who was a currency trader for years, joins me this October to review our multi currency portfolio thinking for the year ahead.
To help our Multi Currency subscribers meet him and learn direct how Jyske can help, we are are dropping the price of your subscription, $249, from the course fee. The normal course fee is $749 for one or $999 for two. The fee for all Multi Currency Portfolio Course subscriber is reduced to $500 for one or $750 for two. Send me an email at firstname.lastname@example.org to set up the discount.
Please send me any other questions. I’ll give the questions priority if you add BL in the subject line. I cannot give you direct investment advice individually but can answer questions (without disclosing your identity) in these lessons.
Better still ask you questions in person! Join me with Thomas Fischer Friday to Sunday, October 3-5.
This will not be all work-no play. We selected this weekend as the most likely to be beautiful with the autumnal leaf change. The colors are glorious.
Here delegates at a previous course chat during a coffee break.
The October course is traditionally our smallest so we time to take questions from everyone. Save $249 (the fee you paid for this online course) off the normal enrollment.
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