Dollar Speculation

by | Aug 25, 2016 | Archives

Multi currency speculation can be good.   Right now, if  you have a good value multicurrency portfolio borrowing US dollars to invest in euros makes sense in three ways.

First, periods of low performance are followed by periods of high performance.  The euro fell from 1.44 euro per dollar in August 2011 to 1.04 euro per dollar in March 2013.  Since then the euro, despite Brexit, has slowly, but steadily gained strength.

US dollar chart

Euro US dollar chart at Bloomberg.com

The euro is rising versus the US dollar even though the euro has a negative interest rate.

Euro fundamentals are in much better shape  than the US dollar.  The chart below shows that the euro area’s Trade Balance, Current Account and Budget Balance are far stronger than the US.

economist markets and data

Chart from Economist Markets & Data

These are signs that makes sense to borrow dollars to invest in the euro.

Second, borrowing dollars and investing in euro is a hedge.  If your investments are like mine, a lot of your savings are in US dollars (mine are in US real estate).

This portfolio in other currencies is a purchasing power hedge.   We live in a global economy.  The strong US dollar means that our European vacations, services, cars and goods cost less. When the dollar drops, our cost of living rises. Our non dollar investments get a boost to compensate for this loss.

Third, over half the good value developed markets are European and 40% are denominated in euro.  Studies show that when you invest in good value markets, you increase profit and reduce risk.  The US market is a poor value market so investments in dollar denominated Wall Street have less long term potential and greater risk.

keppler-analysis

Keppler Asset Management ranked buy, neutral and sell developed markets.

Borrowing dollars to invest in good value markets makes sense, when you borrow intelligently as explained below.  Leverage increases profit potential and risk, especially if we cannot control the time dimension.  Never borrow more than you can afford to protect or lose.

Gary

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