What a Weak Dollar Means to the Investor

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The Bad Word

“Weak” is usually has a derogatory connotation when we think of anything. Which football team would want a weak defense. Would you want a weak foundation? You get the idea. So how do we interpret what the weak dollar means to investors?

A Tale of 2 Cities

The dollar’s weakness means that imported goods and services cost more and our exported goods and services go for less. This is a relative thing.

For example, John Chow said his biggest income killer was the falling dollar. Since most of his income comes from U.S. companies he feels the pain when his dollars get patriated into Canadian dollars.

On the other hand when he purchases goods made in the U.S. such as a Dell computer, it should cost less (though I’m sure he gets them free due to his tech website).

As you can see it goes both ways. While our imports cost more, we are able to export more (in theory). You can see this as a problem or opportunity. Theoretically a weak dollar means our exports become more competitive and this could lead to increased domestic production. In turn our trade deficit may start to go down as we export more and import less.
Foreign governments have tried to slow the fall of the dollar by investing in U.S. Treasury notes. In effect foreign governments have subsidized our national debt. Why would they do that? For many nations the U.S. is the biggest importer of their goods. Take our earlier example of Canada. Canada is our largest trading partner. The movement of the U.S. dollar has major implications. If not for foreign holders of Treasury notes, our real interest rates would be higher.

What do I do?

No one knows how far the dollar will fall. However, here are some things to consider:

• Consider investing in companies that have significant overseas sales.
  • (CAT) Caterpillar - builds the heavy machinery used in mining and excavation. A play on international development.
  • (PG) Proctor& Gamble - Global consumr goods company should benefit from the growth industry of vanity.
  • (PEP) Pepsi - Beverage is big business and the growth is coming from overseas.
  • (CSCO) Cisco - Cisco is a big player as international companies grow their IT infrastructure and nations modernize their technology. Their heavy-hitting switches stand to increase sales in the booming global telecom sector.
• Look at domestic manufacturers that may become more competitive. Some marginally profitable companies may become profitable.
• If the economy concerns you buy some gold. In particular the gold ETF - GLD is an easy way to participate in the gold market without the hassle of physical delivery. Or if you prefer you can buy coins directly from a reputable dealer. I recommend Monex as that is who I use. (I just looked today and my gold coins are up another $8)
• If you believe the trend will continue, buy some foreign CD’s. I have gotten the benefit of the Indian rupee going from 45 rupees/1 dollar to a recent 40 rupees/1 dollar for example. In effect I made 12.5% on currency appreciation alone. Coupled with the fact that foreign CD’s typically pay higher than the current U.S. rates and you have a winning combination. If you had invested in the Icelandic Krona CD you would be sitting pretty right now as the dollar continues its decline. My Krona CD was set to rollover and I have another month to maturity. I will most likely be getting some significant currency appreciation in addition to my roughly 12% return.
• If you are in a position to export goods or services or have considered it then this is a good time. While exporting goods is more involved, you can attempt to export your services using sites such as guru.com or eLance.com. Both allow individuals to post and bid on projects that may be anywhere in the world.

We live in a truly global economy. It doesn’t have to be overwhelming. Understand and accept that though you may be acting locally you are part of a bigger global economy that will wait for no individual. The sooner you can grasp the idea, the sooner you can start to act globally and take advantage that the global economy affords you.

There are two books on the global economy I highly recommend to everyone. The first is The World is Flat. It gives a great perspective of the global economy and how it has changed the world. Another book I recommend is The 4 Hour Work Week. It is globalism taken to the extreme.

Related Posts:

• How to Earn 12.28% in a 4.5% World
• What Does the Potential Fed Rate Cut Mean?