At investment conferences over the past three years, I’ve gotten into regular tooth-and-nail debates with other analysts about the future of the U.S. dollar.
I’m an unrepentant bull. My opponents have been relentlessly bearish.
But they must be feeling a bit red-faced lately.
The dollar just logged its longest winning streak in more than 17 years, rising against a broad basket of currencies for nine straight weeks.
[ad#Google Adsense 336×280-IA]It is up over 3% this year and nearly 18% since hitting its 2011 low.
Why is this happening?Two reasons.
The first is that the Fed has signaled that it will raise interest rates in the year ahead, while Europe and Japan are adopting easier monetary policies.
(International investors shop for higher-yielding currencies the way bank depositors shop for higher-yielding money markets and CDs.)
Why are these other countries holding down interest rates?
That goes to the second reason for U.S. dollar strength. Their economies are stagnant. Ours is growing at more than 4%.
Why It Matters
A stronger dollar drives capital flows our way and helps support U.S. stock and bond markets. Foreign investors can look forward to appreciation in both the securities they own and the value of our currency against theirs.
A rising dollar also undermines globally traded commodities like oil and gold. That’s why the same analysts who were wrong about the dollar were also wrong about precious metals.
Yet many bears still insist that the decline of the dollar is “a no-brainer” because the greenback will soon lose its status as the world’s reserve currency.
This has always been a ridiculous fantasy.
The U.S. economy produces almost a quarter of the world’s wealth. Our country is the primary defender of the free world. (Only four of NATO’s 28 members – America, Britain, Estonia and, egads, Greece – fulfill their obligation to spend at least 2% of gross domestic product on defense.) The U.S. plays an extraordinary role in world leadership, even with You-Know-Who at the helm. And no other country attracts more students, more immigrants and more direct foreign investment.
Nowhere Else to Turn
What is the alternative to the dollar as a reserve currency?
Certainly not the euro, a political experiment between powerful large countries and profligate smaller ones that still threatens to come apart at the seams. Not the yen, the currency of a country that has fought a debilitating two-decade fight with deflation and whose budget deficit as a percentage of GDP is more than twice as large as our own. Not the yuan, the currency of a Communist nation that doesn’t recognize the most basic rights of its own citizens. And not the Swiss franc. Although Switzerland is a fine example of fiscal probity, its economy (ahem) is slightly smaller than that of Massachusetts.
Having been completely wrong about the direction of the dollar, expect the bears to now start arguing that its growing strength is actually a bad thing. (Isn’t it funny how the facts change but their conclusions always remain the same?)
True, a firmer dollar makes U.S. exports more expensive and exacerbates our trade deficit. But there is a positive side as well.
A stronger dollar keeps a lid on inflation. It holds down energy prices. (Notice that prices are lower at the pump. Oil slipped below $93 a barrel earlier this week.) Imports are less expensive. And most attractive overseas growth markets for the U.S. are not Japan or Europe but emerging markets – and most of them have their currencies pegged to the dollar.
So embrace the greenback. If the trend is your friend – and it is – the dollar looks awfully companionable.
Good investing,
Alex
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Source: Investment U