A Strong Currency is a Mixed Bag
[Note: The Post of the Day will be on hiatus from August 18 through August 22. Please check the archive for great posts you may have missed.]
Board: Macro Economics
All of a sudden currencies are taking a front row on Metar (and coincidentally, those I'm heavily invested in).
As Suisebear pointed out, having a strong currency is a mixed bag. If you travel abroad, everything seems cheap, but at home, domestic product and services are expensive (driving business abroad). The US has a prior history of this and the effects on our manufacturing industry are still evident. The Swiss central bank has spent billions of francs purchasing Euros and US dollars. So far, the benefits which have been gained have been short lived (as the Euro smack down continues to force money into the Swiss franc.
The Australian dollar has a very volatile history. The very fact that I was able to buy them at such an attractive price (at the end of October 2008) and end up with the interest rate that I did (8%) was a testament to this fact - and a reminder that "what the good Lord givith, the good Lord can taketh away". That said, as long as most other currencies (at least those that are not under immediate challenge - such as the PIIGS and Zimbabwe) offer interest rates at nearly zero and as long as China keeps buying resources, the AUD should stay fairly strong. Let either world material consumption slow down or one (or more) major currencies be forced to pay higher interest and the AUD could quickly become toast.
That said, it would seem that the CHF, the AUD and the USD all have risks, but to a certain extent (since currency values are ratios) the movements are mutually exclusive as they are in relationship to each other.
Gold, as SB has pointed out in comparison to the Swiss franc (and I pointed out last year in relationship to the Australian dollar) does not have to rise compared to other currencies simply because it becomes more expensive in terms of US dollars. It is important to realize that the US dollar is at an historical low point and a decision has to be made by the future-looking investor as to whether it will continue to sink or whether Europe's problems are larger than the USD's and there is likelihood that the USD will rise. If this is your premise, then equities will drop and it is possible that (while rising in relationship to the Euro), gold may be disappointing in terms of USD.
Am I in a hurry to trade my CHF or AUD (or physical gold) for US dollars? Would I currently trade my USD reserves for bonds or more heavily into equities? Not really. These are long term hedges/investments and have all been picked up at points in time when they were out of favor. Since then, all have provided a balance to my other assets. The only difference between what I'm holding and what others hold is partly nuance and partly (maybe more importantly) a series of shorts - not necessarily against the dollar, but more correctly shorting much of the global (or at least the US/Euro) economy in favor of deflation.