Too many UK investors couldn’t care a fig about the US dollar. Unless, of course, they’re planning a trip to America and want to know how many bucks their pounds will buy.
But actually, if you’re an investor, the health of the dollar is crucial to you, in more ways than you might think. So let’s find out what’s going on with it… and where it’s heading from here.
There’s no doubt that the dollar is the whipping-boy of the currency markets right now. As we saw in a recent issue of The Right Side, the US currency is trapped under a crushing weight of negative sentiment – and it’s struggling to get out.
It’s hard to say whether the dollar’s recent weakness is about the dollar itself – or whether it’s a factor of investors piling into “riskier” currencies and assets in the hunt for higher returns. It’s probably a bit of both.
Plenty of reasons to sell the dollar
What I mean is that there are plenty of good reasons for any proper anti-dollar sentiment that may be affecting the currency. Reasons why people fear the dollar must weaken. I’ll get to those.
At the same time, this is about greed. Investors, both large and small have been battered and bruised over the past two years. So much so, it’s not surprising they’re jumping on this latest stock market rally in the hope of making good some of their losses.
What’s that got to do with the dollar? Simple – investors around the world are pulling money out of ‘safe’ dollar investments – e.g. US government bonds – so they have some cash to play with. They’re putting it into riskier commodity-based currencies like the Canadian and Australian dollars and riskier assets like gold, silver… and, yes, stocks.
As we saw last week, the dollar recently broke down through its 200-day moving average. That’s the green line on the chart below.
The 200-MDA is a long-term moving average that shows the overall health (or otherwise) of the dollar. Now the dollar has crashed below this line, it’s a sign of very poor health. That’s not surprising given the recent news…
The world’s most renowned bond fund manager recently suggested America might have its credit rating cut. The “Bond King”, Bill Gross of Pimco warned that the US faces a downgrade in “at least three or four years, if that, but the market will recognise the problems before the rating services.”
Then, Barack Obama gave dollar bears another reason to sell the buck. An interviewer asked him recently, “You know the numbers, $1.7 trillion debt, a national deficit of $11 trillion. At what point do we run out of money?”
“Well, we are out of money now,” Obama said. That kind of comment from the most powerful man in the world doesn’t inspire confidence in his country or his country’s currency.
And there’s been plenty more dollar-bashing from high-profile commentators.
On 15 March Dr. Doom, or Marc Faber, wrote in his Gloom, Boom and Doom Report: “The US government for sure will go bust. That I guarantee you. Not tomorrow, but it will go bust.”
So it’s easy to see why the dollar is suffering.
Not dead yet…but trending down
Of course, it’s not dead yet. Despite what these big shots are saying, the world is not ready to give up on the dollar yet.
And with stock markets starting to look way overstretched to the upside, all we need is one major shock to scare investors… and the dollar’s going to come roaring back into favour. For now at least, the US is still the world’s most powerful economy… and that makes the dollar the world’s safest currency.
But there’s no denying that for now the trend is down. And while it is, the dollar index could easily head towards the red line I’ve drawn at 76 on our chart – a level last seen in September 2008.
But how do you play it? Well, dollar-denominated assets like oil, gold and silver will do well. As the dollar falls, they will continue to rise. And if the dollar rout is to continue and get any worse over the long term, then remember your stock portfolio will be affected too. Any companies that have dollar earnings are going to see their numbers negatively affected.
Best regards,
Frank Hemsley
For The Right Side
MARKET NOTES
Yield trumps growth in a downturn
BY SHIVVY ARORA
Investors often have a one-track mind on chasing capital growth and they overlook dividends. But dividends can boost your returns and solid dividend-paying stocks are often less risky than ‘racy’ growth shares.
Companies with high dividend yields reward shareholders for their risk on capital. However, growth stocks usually do not pay a dividend, as the companies would prefer to reinvest earnings in capital projects.
The chart below shows the relative performance of stocks with the highest dividend yields against that of the best performing growth stocks since 1990. When the line rises, it means the high yielders are beating the growth shares and vice-versa.
You can see that in the bull market of the early 1990s, high yielders underperformed growth companies. But from mid-1994 to mid-1998, they made a comeback.
Dividend yield investing a better bet than growth investing during a slump
Source: Citi Investment Research
You see, in the final stages of a bull market, investors tend to chase earnings growth and dividend stocks underperform. But high-yield shares clearly do better in a recession.
High-yielders outperformed growth shares from Aug 1994 to Nov 1998 and then post-1997 – both bad periods for markets. They also did better in sideways markets. From 2001 until early 2005, dividend yield again outperformed, including the 2001 economic recovery.
So, yield beats growth during a downtrend.
The Daily Reckoning – The US is pushing its phony money all over the world
BY BILL BONNER
London, England
Tuesday, 2 June 2009
“You ain’t seen nothin’ yet!” Actually, we’ve seen so much already that it’s hard to believe there’s more coming. But there’s sure to be more... and we have a feeling it will be worth the wait.
Yesterday, for example, GM filed for Chapter 11 bankruptcy protection. It couldn’t pay its bills. GM was once the strongest corporation on the planet. But it has been around for nearly 100 years. Heck, everything wears out eventually... even a ’55 Chevy.
“Obama Nationalizes GM,” says a triumphant headline in France’s “La Tribune.”
Triumphant?
Yes. According to the papers, Obama may have been handed the keys to GM... but the old jalopy is worn out. The French say the whole US economic model is ready for the junkyard. More on the French - and the French model, below...
First, let’s stick with the USA.
The Dow rose 221 points yesterday – to 8,821. Investors think the worst is over.
Everything is going up. Copper is up 65% so far this year. Oil is up 53%. Soybeans are up 22%. Stock markets are up about 30% worldwide. And gold is up 12%. In this company, gold is a laggard!
Copper has risen so much, say the papers, because China is buying all it can get. What it is doing with the stuff we don’t know; maybe it is stocking up at what it believes are low prices.
Maybe it is hedging its bets. China has the biggest pile of Treasury bonds in the world – $768 billion of them. That’s 768 billion reasons to worry. That’s because each T-bond is denominated in dollars... and while everything else is going up, the dollars is going down. Yesterday, the dollar touched a new low against the euro for this year – at $1.42…
Read on…
To read the Daily Reckoning in full, click here.
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