A Weak Greenback: Take Advantage
The US dollar has for many years been the standard by which the other currencies have been measured – it still is; however in the last 6 years, it’s been trending steadily downward – losing as much as 21% of its value against the euro.
Why the falling dollar?
There are many factors that affect the value of currencies, including:
- Trade deficit: There are two primary forces that control the value of a currency – the trade deficit and capital flows financing the trade deficit. The U.S current account deficit is about $800bn annually, translating to purchases of more than $3bn in foreign goods and services daily. The US is buying more goods and services than its selling to foreigners; we’re therefore, demanding more foreign currency than foreigners are demanding the dollar. This trade deficit drives up prices of foreign currency – which is bought with the dollar.
- Inflation: A low inflation rate favors a strong currency and vice versa.
- Interest Rates: Lower interest rates within the country than abroad favor a weak currency.
- Monetary policies: According to the CATO institute, the biggest contributors to the weak dollar are inconsistent and incoherent economic policies by the Bush administration ultimately resulting in reduction in foreign confidence in the dollar.
- State of the domestic financial market
- Political Unrest in Other countries: There are circumstances which the US has no control over that has an impact on the value of the dollar.
A weak dollar isn’t all bad. The term ‘weak’ has been used to denote bad and ‘strong’ to denote good; the truth is that there are advantages and disadvantages to both a strong dollar and a weak dollar.
In the remaining part of this article, we’ll take a look at how you can take advantage of the current situation of the dollar.
A majority of goods available in the largest departmental stores are produced in China and exported to the US. Even with the weak dollar, you can continue to enjoy shopping at Wal-Mart because the Chinese Yuan is pegged to the dollar such that fluctuations in the value of the dollar don’t really affect prices of Chinese made goods.
For luxury goods being imported from Europe however, you can expect to pay higher prices as a result of the higher exchange rate.
If your plan is to spend the Christmas at a hotel in Paris, a weak dollar means you can buy fewer Euros, so vacationing in Europe will be just a little more expensive that it used to be. If cost matters to you however, you should consider cheaper alternatives including Canada, Mexico, The Caribbean and South America – the weak dollar would still have a high purchasing power at these places.
For those in the tourism business, a weak dollar is great for business because there would be more European tourists visiting the country.
A weak dollar means that products from US factories are now less expensive and therefore sell more in the foreign market.
More than 2 years ago, Jeremy Siegel, a Wharton finance professor and investing sage suggested that American investors keep 40 percent of their stock holdings in foreign shares. Developed markets such as Austria, Canada and Sweden turned in performances for their local investors similar to the S&P 500; an average US investor who listened to Siegel and invested in foreign markets would have realized gains of 50 – 60%. If you had invested in an emerging market like Brazil or Argentina, your dollars would have gained as much as 120%.
The weak dollar brings in extra returns for U.S investors holding foreign stocks.
Many have painted the weak dollar as a sign of some impending doom to come. In the main time, I believe it’s wise to stay away from people who believe ‘the sky is falling’ and take as much advantage of the situation as possible.