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
"Buy Stocks Because U.S. Dollars Will Be Worthless," according to Marc Faber, editor of The Gloom, Boom & Doom Report. However, in the near term, Faber sees plenty of money-making opportunities in certain equities. Sure, prices aren't as cheap as they were in March, yet he's confident, "in this environment cash will become worthless." As a result, he says investors are, "better off being in equities," for the next two to three years. Faber is most bullish on mining and energy companies, such as Newmont Mining (NEM) and FreeportMcMoran (FCX); again inline with my ITZ PIX portfolio theme!
Fed Chairman Bernanke has said that the recession is "very likely over," but the Fed isn't acting like we're in a recovery. Economists widely believe the central bank will keep interest rates between 0% and 0.25% at the conclusion of its two-day meeting this Wednesday. One would expect the Fed to raise interest rates once a recovery started, but it hasn't in part because this recovery is weak and tepid, we could see a jobless recovery. Which would mean that consumer spending will be as weak. Unemployment is still rising, retail sales are far from robust, manufacturers' capacity utilization remains at ultra-low levels and wages are still depressed. Home sales and new home construction are making a comeback, but they're coming off of historic lows.
As for the US Dollar, that bounce yesterday didn't last very long did it? Back down to that all important support level of 76. A sustainable break below could the final boost for gold to trade above the $1033 resistance level and for the DJIA to break over 10,000. But then what? Most traders can live with a steady decline in the dollar, but a rapid plunge near term could scare off equity investors and spike gold to extreme levels. Marc Faber's commentary is on a long term view of the dollar, many scoff at his views, but even so, just look back to this March and how close (even according to the President, Fed Chairman & Treasury Secretary) we came to falling into an financial abyss?
The dollar is now so weak that it has become the currency of choice for the new “carry trade” – where investors borrow currencies at low rates and invest in another currency at higher rates. Simon Derrick at The Bank of New York even said that “The dollar is the new yen.”
Another shocking fact about America’s waning world influence comes from the Boston Consulting Group (BCG) ~read story~, which issued a report that showed how Europe has surpassed North America as the richest region in the world. The BCG report said global wealth fell 11.7% to $92.4 trillion in 2008, the first decline since 2001. North America saw the biggest decline in wealth, falling 21.8% in 2008. The total wealth in Europe fell by only 5.8%, while Latin America was the only region where wealth grew, by 3% in 2008.
One other interesting comment last week came from former Fed Chairman Alan Greenspan, who said that he is worried that Congress will hamper the Fed’s efforts to rein in its monetary stimulus, and that inflation might “swamp” the bond market. Specifically, Greenspan said in a broadcast to Tokyo clients of Deutsche Bank Securities on Wednesday that “it’s the politics in the United States that worries me.” Mr. Greenspan also warned that the U.S. must rein in its “very dangerous” level of debt.”
The US Dollar advanced on Monday, up for a third day versus the euro and a basket of currencies, as investors shied away from risk-oriented trades ahead of this week's meeting of U.S. Federal Reserve policy makers.As I noted recently that the 76 level would most likely present a technical bounce. The trend is still downward in my view, trading within a descending channel since June.
The Fed's rate-setting Open Market Committee could opt this Wednesday a signal it's ready to begin outlining an exit strategy from its massive monetary-stimulus efforts helped pressure equity markets, spurring support for the dollar. Also this week is a summit of the leaders of the Group of 20 global economic powers, which gets under way Thursday in Pittsburgh.
Still, dollar weakness has been exacerbated in recent weeks amid signs the greenback is taking on a role as a funding currency for carry trades, in which investors sell a low-yielding currency and purchase higher-yielding currencies.
Use any bounce here in the Dollar to buy on dips in equities.
Interesting view from veteran trader Art Cashin (CNBC)
*click on chart to expand image
Yesterday I brought up the US Dollar, along with the Treasury auctions next week. The Dollar has shown some strength of of the Jobs Report numbers this morning and is currently at 78.9 as I type. I have annotated 2 charts below, one a daily highlighting a downtrend channel. The dollar is now testing the upper end of that channel near the 79 level. On the second chart there appears to be a possible "Bullish Divergence" pattern setting up. My observation suggest a rally in the dollar could bring it up to the 80 level, then a resumption of the decline towards the 76 support level. Bottom line...depends on how the Treasury auctions go next week?!
The dollar traded near the lowest level this year against the currencies of six major U.S. trading partners on speculation the global economy is shaking off the worst recession since World War II, sapping safety demand. ~read more~
