Ted Allrich is the founder of The Online Investor and author of the just released book: Comfort Zone Investing: Build Wealth And Sleep Well At Night. In this weekly column, he'll offer advice to investors who are just getting started.
As of this writing, a Euro costs $1.37. That's the most one has ever cost. A pound costs $2.02, not seen for decades. What's with the dollar, and as an investor, should you care?
The answer is, of course you should. You know the BMW you lust for? That will cost you more. It's paid for with Euros. How about Earl Grey tea? That will be going up in price, too. You need pounds to buy that. Not here in the U.S. We still transact with good ol' greenbacks here. But the store selling the tea or the auto dealer prepping your new ride has to pay the manufacturers in Pound Sterling and Euros respectively. That means less of those items will be sold because the law of supply and demand says that when prices go up, fewer things are sold.
As an investor, you have to check your portfolio for any holdings headquartered in Europe. If they have large sales to the U.S., those revenues are going to shrink. Profits will follow.
On the other side of this foreign exchange coin is the advantage a weaker dollar brings, and it's a big one: more sales to Europe. When the dollar slides, the cost of U.S. goods goes down, simply because it takes fewer pounds and Euros to buy the same amount of goods. Again, quoting the law of economics, when prices go down, more items are sold.
As investors, that's the good news. Any stocks you own that export a large percentage of their products or services to Europe should see a gain in sales as what they offer goes down in price, not in absolute terms, but just because of the weakness of the dollar.
When does the dollar start to gain strength? Only when interest rates begin to rise in the U.S. or rates go down in other countries. Right now the British Central Bank is tightening rates, concerned that inflation will be a problem. The same is true for the European countries. As they raise rates, their currency will strengthen because money always flows into currencies where it will earn more. Until these countries lower their rates, the money will continue to pour into them, including U.S. dollars. Unless the Fed raises rates to stop that outward flow of the greenback, don't look for the dollar to stabilize or gain against these other currencies.
Of course, the Fed will have a hard argument to raise rates with the housing market so depressed, and its ripple effect throughout the economy. Unless inflation shows up in significant numbers, the Fed won't be raising rates any time soon. If the housing market stabilizes, and the economy gets too robust, then the Fed can move. Until then, expect a weak dollar to continue to influence more than the price of BMW's and tea.
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Reader Comments (Page 1 of 1)
7-14-2007 @ 2:09PM
hal c said...
I'm not an economist but it seems to me that there are a lot more factors at work in currency values than simply deposits in banks of the nation with the highest interest rates. Globalization by huge mulit-national corporations has changed the way we must look at world currency.
I don't know how it is in foreign countries that buy our goods but I've noticed over the years that the price of foreign goods remains stubbornly low stateside even when the dollar plummets.
As for inflation, our government's data has about as much substance as the emperor's new clothes. The real inflation rate in the US is probably almost 8%.