Dollar Purchasing Power Under Pressure
Board: Macro Economics
Well the US dollar index hit a 52 week low last night and now stands at 74.36. This took out the low of December 2009 as well, but still hasn't gotten to the all time low of 70 that it hit in early 2008. IT's decline today was .90% which is a big deal. The US equity market is likely to celebrate and resource intensive stocks should outperform.
Oil is back above $109 a barrel, gold is above $1,500 and silver is continuing to outperform gold.
I won't bore you with individual currencies, other than to say that just about all have risen with the CHF, AUD and CAD near their highs for the year.
What does this mean to the investor? Well, most of us evaluate our holdings in terms of USD, but the same could be true of any currency base:
As a currency decreases in global purchasing power, especially when cash does not compensate with appropriate interest returns, while the absolute sum remains the same, your assets are decreasing. As the US dollar drops, for those using that currency as a benchmark, it is imperative that other investments take up the slack. These can be stocks, commodities, gold/silver, foreign currencies or whatever, but it is clear that one must be diversified out of pure dollar holdings in order to compensate for their loss of value. We are being told that inflation is "in check". From the way that it is calculated, that may be the case. OTOH, from the standpoint of our personal expenses, prices are rising and without replacing that loss of purchasing power, our potential standard of living is being impacted.
Some of us prefer to ride single horses in the race, but my preference is for a broader spectrum of holdings which provide inertia against sudden change. Regardless of the strategy employed, and realizing that things may change direction quickly (and therefore maintaining a large cash position is a prudent policy), market participation is mandatory as long as the US dollar keeps sinking. That said, for those who use different currency bases, the effects of the dollar decreasing also affect the valuation of US equities and bonds that you may be holding. While there may be a buying opportunity down the road, it is important to understand your exposure and risks as the increase in US equity prices has to be adjusted to the way your particular currency is behaving compared to the dollar.
In the absence of interest rate increases, which I don't expect in earnest (there may be a small one at the beginning of 2012 to show the Fed is serious) until after the 2012 presidential election, and in the absence of negative news from the Eurozone (or an economic fault line developing in China), I expect the US dollar to continue to be pressured.
While the US population feels vindicated by the recent agreement to cut $39B from the federal budget, it can't be lost on the international bond holders that the CBO reported the actual savings this year will be about $380M. They will also listen for the timing of the cuts that Congress will discuss and likely note that the majority of them won't take place until well after the next election. The Fed will probably not continue an overt QE3, but will sub-rosa continue to support the bond market to the best of their ability. That said, in the absence of "black swan" type news, the bond rally has about run its course.
While I may mention how I'm personally addressing my assessment of the above, I am not an investment advisor and would hate to be responsible for anyone following me into an error of judgment. I am, however asking each of you to think about what I have been chronicling in my various posts regarding currencies as a signal of what is taking place and re-look at your asset allocations. There are numerous ways to skin this cat and they are not mutually exclusive. Make sure you know where the life vests are located just in case the weather gets choppier than you've prepared for.
We take the US dollar for granted. It has been a stable currency for generations in most of our eyes, even as we discuss it's valuation dropping precipitously due to inflation over the last generation or two. I am not saying the currency itself is in danger, but am merely mentioning that the basket of goods you are able to purchase with it is getting smaller over time.