Things aren’t always as they appear.
“Bad” isn’t always bad. “Good” isn’t always good. And, the world, despite how some in media and politics try to define it, is not quite left versus right.
As any good mathematician will tell you, outcomes are influenced by a multitude of variables. And, the answer to a problem is highly influenced by these variables.
Currency markets are a good example of this phenomenon.
As investors nervously eye massive fiscal and monetary stimulus programs out of Washington, they (understandably) question the long term ramifications of the government’s spending patterns, the Fed’s money printing, and increasing disfunction on Capitol Hill.
As such, the value of our national currency–which is, effectively a bet on the fiscal discipline, success, and future dominance of the United States–has plummeted.
The U.S. Dollar is under fire, losing ground relative to its pears.
Although investors initially sought the safety of the world’s reserve currency, causing the greenback to rise 9% in 9 days during the onset of the coronavirus crisis…in July, and early August, that momentum has been undone. July saw the dollar suffer its poorest monthly performance in a decade, with the currency dropping 5 percent relative to its peers. As such, the euro is now trading at a significant percent premium to the dollar, and gold prices have soared to record nominal highs as investors seek an alternative to the dollar. (LINK TO GLD).
I’m okay with that. Because, right now, a declining dollar is good news for the U.S. economy.
Don’t get me wrong. Sure, it’s nice to have a strong dollar. It’s nice when we all get better hotel rates on our European summer vacations. But, the reality is, we can’t go to Europe even if we wanted to! (Full disclosure, I miss that. I was supposed to have been in Corsica again this August LINK TO INSTAGRAM CORSICA HERE.) Realistically, however, a strong dollar doesn’t really doesn’t help our domestic economy outside of enabling us to keep buying cheap stuff from China… stuff that we don’t really need. Although a strong dollar is a wonderful source of pride, it is often detrimental to our growth. Think about it: if you’re a consumer overseas, why buy U.S. goods if they’re so costly? After all, when the dollar goes down, it’s like America suddenly goes on sale. And, that “sale,” encourages overseas’ economies to invest in us.
Simultaneously, a lower dollar helps inflate our markets and commodity prices. When assets are priced in dollars, and the dollar is weak, it takes that many more dollars to adjust the valuation of a product. So, while the price of oil is lower fundamentally thanks to weaker demand in a poor economy, it is seeing some support due to the fact that it is priced in dollars and, therefore, requires more dollars to equal the value of the asset. Same with our equity market. Valuations improve as a result of a lower dollar.
In sum, good news for the American economy despite the fear factor that some in the political and liberal media profess.
As for the frequent rumors being floated that perhaps the U.S. currency will not continue as the world’s reserve currency? They’re just rumors and have been floated before. Unless we embark on a World War III scenario sometime over the next decade, I do not anticipate a change in our currency status. Instead, I suspect that the chatter is being fueled and instigated by China, as I explain here. (INSERT LINK TO MY ARTICLE HERE)
- A lower dollar will help the U.S. economy, its markets, and commodity prices
- Diversification into other currencies and commodities, including gold, is an important asset consideration to weigh as a US dollar helps improve these markets from both a fundamental and currency recalibration perspective
So cheer up. A declining dollar will mean good things ahead.