The Fed is proving its willingness to let more rate cuts dilute the dollar’s value.
Currencies around the world are at record highs, boosting their stock market advantage.
The post-WW2 rise of the Petrodollar is now in jeopardy.
The European common currency, the euro, is at a record high against U.S. money, meaning that many major European markets are more than a third higher in dollar terms than they are in local currency over the past year.
Don’t get me wrong–darn near every stock market in the world has gotten clobbered by the sub-prime disaster and investors’ hangover from the credit-fed bull market of the past few years.
But it’s the brooding gloom of a Stateside recession that has international markets spooked, not native growth. Bernanke & Co. are willing to sacrifice our currency at the altar of economic expansion, and with rate cuts piling up, the relative advantage of the euro is surging skyward by the day.
This means that French, German, and Italian investors lost about 3% less since January 2007 than those attached to dollar-based markets. Just look at this chart of the U.S. dollar vs. the euro over the past two years and the dollar’s decline is as clear as day:
Wall Street players are watching their investments shrivel in comparison to shares trading not only in Europe, but also in places like Israel and Brazil, where, since the end of 2006, the local Bovespa benchmark has skyrocketed by 268% more in dollar terms than when measured in the rising Brazilian real.
However, there are some sideways benefits to dollar-based businesses, especially those on the manufacturing and export end of things.
Dollar-based Production Becomes Cheaper
On Leap Day this year, U.S. aircraft giant the Boeing Company (NYSE:BA) officially lost a $40 billion award for Air Force refueling planes to EADS (PINK:EADSY), its major European rival and maker of the Airbus mark. Citizens and legislators in Boeing’s home state of Washington are up in arms over the loss of this Pentagon contract, which had stayed with Boeing for half a century.
Enter Airbus’s German CEO Tom Enders, who knows that the euro’s climb hurts his bottom line.
Enders told Reuters on March 7 that the record-high euro exchange rate impacts his company’s basic structure so much that he wants to spread the company’s "manufacturing risk and manufacturing base into the dollar area, and particularly countries that are tied to the dollar."
"That strategy is absolutely right," Enders continued, "and if anything the deteriorating dollar is proving that."
So maybe some of those refueling tankers will be built in the U.S. after all, but "countries tied to the dollar" is vague, and could imply manufacturing in any of the Persian Gulf Cooperation Council states, whose currencies are pegged to ours because of the dollar’s long standing as the main currency of the world oil trade.
That brings us to another point: the dollar is no longer the world’s dominant "resource currency."
New Oil-Backed Currencies Beat U.S. Dollar
Brazil’s real rose last week to its strongest level since May 1999, mainly as a result of that nation’s increased financial health (lower debt, more foreign investment) and billions of barrels worth of recent oil and natural gas finds in Brazilian territory.
The loonie, as the Canadian dollar is known, has straddled the line of parity with its southern counterpart since October of 2007–its highest levels in more than two decades.
Canada’s currency has moved up to a one-to-one ratio with ours as the price of conventional oil skyrockets and the tar sands of northern Alberta are now acknowledged as the largest unconventional oil reserves in the world.
Compare this to the United States, where the industrial base of cities like my home of Baltimore was sacrificed at the foot of the "knowledge-based economy." That’s the same new economy that hatched schemes like slicing bad debt into a million pieces and hoping it would vanish into thin air if the proverbial you-know-what were to hit the fan.
Well, hit the fan it did.
And that brings us back to today’s pickle, with the Dow sagging towards 11,000 and no one sure what tomorrow holds.
That’s why I like the Rydex Currency Shares family of ETFs, which allow you to sock away some funds in tickers that are backed by foreign money, fighting the dollar’s decline.
Divorce the Declining Dollar with Currency Shares
The CurrencyShares Canadian Dollar Trust (NYSE:FXC) is your play on the strong loonie, and the Euro Trust (NYSE:FXE) keeps you involved in the eurozone with its 15 member states. A key defensive approach in today’s uncertain global economy is the Japanese Yen Trust (NYSE:FXY), which is rising as currency traders get back into that low-yielding currency and out of riskier, higher-yielding ones like the New Zealand dollar.
Of course, Wealth Daily will keep you up to speed with all the latest international opportunities and show you what your money can really do when put to its best use worldwide.