What Does The Declining Dollar Mean to Your Portfolio?

What Does The Declining Dollar Mean to Your Portfolio?

The US Dollar (DXY) has been dropping, and this has a lot of investors very concerned. Many people feel that the Fed’s “money printing” antics to fight the downturn will create hyper-inflation not seen since 1930’s Germany. 

It is certainly true that increasing the amount of currency in circulation will cause it’s value to decline, because there is more of it. However, the severity depends on the circumstances. In this case, all countries are flooding their economies with newly created liquidity, not just the U.S. In addition, wealth and assets are being destroyed faster than the government can inflate. These two special situations will keep inflationary pressure, and therefore a decline in the dollar will be mitigated.

Still, the dollar did just hit a two-year low in the face of another round of stimulus and after the Federal Reserve reiterated it’s stance to keep rates at zero with a promise to “use all it’s tools to support the economy.”

Although this may seem alarming, it is in fact very normal. The DXY (the U.S., dollar trading index) was trading extraordinarily high because our interest rates were so much higher than other nations. That is finally slipping away as expected…and by design. Currently, the greenback is still trading in the upper-end of its medium and long-term trading range.

Best of all, there is little danger to investors with a reasonably lower dollar because it makes U.S. exports much more attractive. This in turn, will dramatically help stocks and gold.

The last time we had steep declines in the DXY was 2009 as the economy was recovering due to massive stimulus measures. From the March 2009 stock market low to the November peak, the DXY was down 15.27%. During that time, the S&P 500 (SPX) was up 59%. The DXY eventually bottomed in May 2009, which was accompanied by a 23% gain in the SPX.

In fact, throughout the DXY decline, the higher the risk asset the greater the gain as was seen in the Emerging Market Index and Russell 2000 outperforming the S&P 500.

Considering macro-economic backdrop of today where we are awash in excess liquidity, at the early stages of a synchronized global economic recovery, and a reasonably weakening U.S. Dollar, it appears that there is limited risk to long term investors who should continue to add exposure on weakness to stocks and gold. If you have excess money rotting in the bank, this is the time to get it invested.

If you have any comments or questions, please feel free to contact me.


“Invest for need, not for greed!”

Cheers -Keith


Smart Money Newsletter

Written By: Keith Springer

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