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Protect yourself from the dollar's decline
The dollar is at an all-time low against the euro and several other major currencies. Here are the three types of stocks youll need to protect yourself in the months and years ahead.
By Jim Jubak
In case the 280-point explosion in the Dow Jones Industrial Average ($INDU) has blinded you since President Bushs re-election, I think it only my duty to call your attention to the dollars opposite reaction to the news.
On Friday, Nov. 5, the U.S. currency hit an all-time low against the euro. Fridays exchange rate of one euro to 1.294 dollars broke the previous all-time record of $1.2927 set in February 2004. On Friday, many currency traders expected that the euro/dollar exchange rate would push through $1.30 next week.
And the euro isnt the only currency rising against a falling dollar. The Australian dollar hit a six-month high against the greenback last week before taking a breather. The Japanese yen is still a tad under the levels it hit at the end of October, but it, too, is edging toward the highs set last April. The Canadian dollar has moved to multiyear highs against the U.S. currency: You have to go back 12 years to find the Loonie trading at 83 cents to the U.S. dollar.
Its not just coincidence that these currencies were hitting new highs just as the U.S. election drew to a close. Foreign investors, like their U.S. counterparts, have stopped wondering who will win the election and now are focusing on the huge dual U.S. deficits in the federal budget and in the countrys trade accounts.
Bushs flawed deficit-reduction plan
Its likely that the dollar would have come under pressure no matter who won. Both candidates proposed spending programs that would have added hundreds of billions to the U.S. budget deficit over the next 10 years. But President Bush certainly didnt calm the currency markets in his Nov. 4 press conference when he pledged to make the tax cuts of his first term permanent and to privatize part of Social Security.
Estimates for the cost of those initiatives run into the trillions over 10 years. Its likely that no one trading currencies would have been convinced had Bush pledged fiscal restraint, but the president didnt even throw the markets that bone: The administrations deficit-reduction plan is to hope the economy will grow fast enough to produce extra revenue, even at lower tax rates.
The problem with that plan, the currency markets are quite aware, is that even if higher-than-expected economic growth does work to increase tax revenues and lower the federal budget deficit, those high rates of growth will just increase U.S consumption of imported goods and services. And that will increase the other deficit, the current account deficit of trade and services. A big part of that deficit is a result of U.S. growth rates: When the United States grows faster than the rest of the world, our economy sucks in goods and services from overseas at a faster rate than slower-growing foreign economies increase their demand for our products. Its a trend thats led to higher and higher U.S. trade deficits year after year. And faster growth in the United States wont fix that problem. (Thats also why the strong job growth reported on Friday, Nov. 5, didnt do much to help the dollar.)
The only solution, the currency markets are convinced, is for the U.S. dollar to sink so that 1) U.S. exports rise as U.S. goods and services get cheaper for buyers who make their purchases in yen, euros or Loonies, and 2) U.S. imports fall as the declining value of the dollar makes foreign goods and services more expensive for U.S. consumers and businesses.
Declining dollar protection
Its that logic that leads the currency markets to believe that the yen, the Australian dollar, the Canadian dollar and the euro, among other currencies, will continue to climb in value against the dollar, even though they have appreciated in the last 12 months by 5%, 7%, 10% and 13%, respectively.
And thats why I think investors need to add a dose of declining dollar protection to their portfolios in the coming months. There are three kinds of stocks that offer varying degrees of protection.
Why three kinds of protection? Because investors cant tell at this stage how ....
Continued on Page 2
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