What Falling Dollar?
November 06, 2009 – by Richard Band
The headlines are proclaiming that the dollar has been plunging. But like any other view of the markets, it pays to look at the details behind the headlines.
And the key thing to look at is what folks are using as a measurement of the dollar’s value. This comes down to two indexes. The first is the dollar index, which is a composite of the six traded currencies on the U.S. listed futures market that include the Canadian dollar (CAD), Swiss franc (CHF), Swedish krona (SEK), euro (EUR), British pound (GBP) and Japanese yen (JPY).
The second is the trade-weighted dollar index that was created by the U.S. Federal Reserve Bank, which includes the above six currencies along with the Australian dollar (AUD).
The trouble, though, with both measurements is that they don’t include the movements against some of the U.S.’ largest trading and investment partners’ currencies, which of course, include Mexico, China and Hong Kong.
And it gets even worse when you look at the weightings within the indexes, especially the dollar index, which is dominated by the euro with its 57 plus percent weighting.
Why is this important? Because while it might make for great press for the media to hype doom and gloom, you, as an investor, can’t afford to just go along with hype.
What’s Really Going on with the Dollar
Let’s look at the facts of what’s really going on with the dollar.
So far this year, the dollar has indeed given up some value, but not as much as you might have been led to believe. Against the Chinese renminbi, the dollar is actually holding its own, trading up or down a mere 0.01% to 0.02%. And against the additional Chinese currency, the Hong Kong dollar, it’s as flat as a won ton in the making.
Even more interesting: Against the other major Asian power – Japan – the dollar is also actually up by 1.5%.
Against the Swiss franc, the dollar is down by 6.1%, and it’s down by 7.5% against the euro, 4.8% against the Mexican peso and more than 15% against the Canadian dollar.
When looking at the real numbers – the case for dollar doom appears a bit less of a headline grabber. But let’s look at the real impacts of what’s going on behind the scenes of the currency market.
Pundits like to talk about the gloomy conditions of dollar collapse as it comes to trade, commerce and investment flows. The idea is that with the end of the dollar, our trade will collapse, and the world will simply stop selling to us, financing us and investing in us.
Well, if indeed the dollar has been dropping like an Acme anvil in a Warner-Brothers cartoon, we should be seeing the real world impacts on the flows of trade and investment, right?
Only problem is it’s not showing up.
Sales of goods and services to the U.S. from our major trade partners keeps climbing even with or as well as, most of the world’s crummy economies. The biggest seller – China and it’s Hong Kong — have been increasing sales to the U.S. by some 7% in the last reported monthly data, amounting to nearly $26 billion. The European Union came in with gains of 8% to $25 billion. Japan sold more by some 4+% at $8 billion. And back in North America, both Mexico and Canada saw gains amounting to $14 plus and $18 plus billion respectively.
Meanwhile, it you look at our sales to those same countries we sold less slipping by 2+% on average.
We keep buying and they keep selling.
More importantly, the world keeps financing and investing in the U.S. markets. The Fed tracks the transactions month by month as it watches all of the bond markets, stocks and other securities that go in and out of the U.S. via all of the listed and over the counter markets.
And over the past 10 years, the gains keep coming, meaning that the world keeps sending its savings and investments flowing at a greater pace into the U.S. market, currently running at gains of over 44% – and that’s even with our common bubble and bust cycles every few years.
And so far this year – as the dollar is supposed to doom us and our markets – the inflows of capital from outside the us is soaring even higher by more than 96%.
And this is as the so-called trade-weighted dollar index is down some 12% for the past 10 years and down 2.8% year to date.
So, if the dollar’s demise is supposed to crush our markets, no one told the guys that actually do the heavy lifting when it comes to real cash.
And for those that are touting the dollar’s doom as bringing inflation citing the real goods markets of commodities as being a good yardstick, it’s not showing up. For the past two years, the Commodities Research Board’s CRB index of commodities is down more than 16% and even crude oil is down over 5%.
The good news is you can make profits by the boatload in the currency markets.
The key to cashing in on currencies is to focus on what’s going right. The winners in the currency market won’t be those that hope on a collapse of the U.S., but rather focus on the winning strategies of the up and coming markets.
I recommend five core closed-end global bond funds that invest in currencies and markets around the globe. These funds offer better yields and better market opportunities than investing in just the U.S. and the U.S. dollar by focusing on governments and local markets that are improving in their own right rather than just depending on a downdraft in the U.S.
And they work and keep working year after year, whether the dollar indexes go up, down or nowhere.
They include the AllianceBernstein Global High Income (AWF), The Blackrock Income Opportunity (BNA), Pimco Strategic Global (RCS), Templeton Emerging Markets (TEI) and the Western Assets Emerging Markets (ESD) which merged with Western Assets Emerging Markets Floating Rate –EFL).
So far this year – the collection is averaging returns in excess of 53% while paying you to own them an average dividend yield of 8%. And while the Pimco trades as always at a reported premium, the average for the remaining balance is running at a discount of what they’re worth at market prices by some more than 4%.
The proof is in the numbers. You can fool around with a negative dollar index fund and maybe make something if the gloomers are right – or you can follow my lead and invest in markets and currencies that perform with or without the dollar. Your choice.
Neil George is editor of Stocks That Pay You.
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