Thursday, October 22, 2009

Profiting from a Declining Dollar

The U.S. dollar is trading around $1.50 per euro, but it is only a matter of time until the euro heads back toward $1.60. As a result, Bloomberg reported last week that central banks are dumping dollars in favor of euros and yen, pushing the dollar lower. In particular, China (with $2 trillion in foreign reserves) is shunning the dollar as never before.
Bloomberg link

Whats BAD for the U.S. Dollar is good news for U.S. investors in global stocks, since it provides them with a “currency tailwind.” In addition, nations rich in natural resources have extra-strong currencies due to their commodity exports. Below is a chart of leading commodity-rich global markets and their comparative returns in U.S. dollars vs. local currencies.

With the declining dollar, a good strategy continues to be to buy shares in companies that create earnings in foreign currencies. But U.S. companies can profit from a weak dollar, too. Caterpillar is an example of a manufacturer with positive earnings guidance, since a weak U.S. dollar makes it more competitive. Also, multi-national companies like Colgate-Palmolive are paid in foreign currencies that are appreciating to the U.S. dollar, so they benefit from a weak U.S. dollar, too.

The current stock position in the Itz Pix portfolio has benefited from the falling dollar.
*click charts to expand images

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