Complaining about the value of the U.S. dollar is like complaining about the heat… There’s nothing you can do to change it. So why bother?
We can’t magically make our dollars buy more in the international market, just like we can’t magically turn down the temperature outside from a sizzling 90 degrees to a comfortable 65.
We can turn on the AC though… or dive into a pool. And there are similar ways to turn a falling dollar into investment success.
Let me explain…
Lately, the almighty greenback isn’t looking too indomitable.
The U.S. Dollar Index (“DXY”) is down 10% from its recent high in March. That peak was just before the Federal Reserve drove down interest rates to a record low.
When the dollar is weak, everything America imports becomes more expensive. And we all know America loves to buy stuff made by other countries.
It’s not just stuff made by China, either. When combined, imports from Canada, Mexico, Japan, and Germany are worth twice the value of goods shipped in from China.
In total, the U.S. imported $1.1 trillion worth of goods in the first six months of 2020. And it only sold $690 billion to other countries.
If the dollar had held its highest value reached in March, America’s import bill would be smaller by tens of billions…
But it didn’t. Instead, it fell 10%. Now, everything that Americans buy abroad is that much more expensive in dollar terms.
It’s also why, despite China’s increasing purchases of U.S. goods, the trade deficit between the two countries isn’t going down nearly as fast.
Like the hot weather, most people will complain about the weak dollar. But instead of complaining, I recommend that you act. And I don’t recommend you buy gold…
Sure, gold has been an obvious choice when the dollar falls. It’s obvious because when the dollar falls, commodities – like gold – see their dollar prices rise to compensate.
Since March, gold has gained roughly 34% in dollar terms – much higher than the 10% drop in the U.S. dollar index. Silver has done even better, soaring by about 140%.
But there’s another asset that does well when the dollar is falling. Moreover, unlike gold or silver, this investment’s rally is just getting started.
I’m talking about stocks in emerging markets. These economies tend to do well when the dollar is trending down – as it is today.
That’s because most emerging market economies export commodities and natural resources. So a falling dollar means they make more money for exporting things like gold, silver, iron ore, and copper… as these assets rise in price.
These countries also tend to have large debts denominated in U.S. dollars. In times like these, they can pay less of their own currency to service their dollar debts.
Finally, emerging markets typically don’t have an advanced manufacturing industry. They buy finished goods – like automobiles, televisions, and laptop computers – from overseas. And these goods are usually priced in U.S. dollars.
A falling dollar is a win-win-win for emerging markets. And those benefits can boost their stock markets in a big way.
You can see this by looking at the iShares MSCI Emerging Markets Fund (EEM), an exchange-traded fund that tracks emerging markets. When DXY lost 17% from March 2009 to April 2011, this fund rallied 136%.
More recently, when the DXY slid almost 10% from the start of 2016 to the start of 2018, EEM leaped 62%.
But these gains in EEM were both outdone when DXY fell 24% from April 2003 to November 2007. That time, EEM soared 365% during the same period, while gold managed to only double.
Keep in mind, these powerful rallies in the emerging markets took, on average, about three years to play out.
So, even with the dollar down 10% and emerging market stocks up 45% since March… this predictable trend of profits is just in its infancy. But it won’t be for long.
Good investing,
— Brian Tycangco
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Source: Daily Wealth