US Dollar January 2004* This article about the US dollar was published in January 2004 * As the dollar continues to lose ground against other major currencies (most notably the Euro) it is losing value day by day. To you and I, that means our purchasing power (if in dollars) is being lowered. When a currency is devalued, there is often a major turning point so that people can look back and say that it was on such and such a day that everything changed. The day on which the pressures facing a currency became too much for the central bank defending it. This has not yet happened to the dollar, though it might. At first, it was news when the euro was hitting lifetime highs against the dollar. Now, it is commonplace. Almost daily, the dollar falls further. The capture of Saddam Hussein helped the dollar for a day or so. As it falls further, the reasoning becomes clearer to all who follow finance. As further news is revealed, the future looks bleak. I remember reading in early summer (a problem of mine is that I read so much that I can never remember where I saw things) that the report about September 11th in which the Saudi rulers were unable to defend their actions (do you remember? the report had omissions which the US government would not reveal) caused the Saudi government to start selling their dollar holdings in frustration. Whether this was true, who knows? But, the Saudi's have big American holdings. Of course, right now, the selling is mostly via fund managers. For the first time in several years, world stock markets (and the funds) are showing profits. Bonus territory is being hit by these managers. The last thing these city guys want to see is the value of their bonus eroded because the fund loses money by being in dollars. The result? Sell the dollars. Simple really. The thing that really emphasises this fall though is just who is selling. I have recently read that both Warren Buffett and George Soros are both heavily diversifying out of dollars. This is big news. Both of these guys have forgotten more about profitable money management than most other mortals will ever know. Even more telling, is that it is Warren Buffett doing the selling. Almost all his holdings (via his company) are in the US. Over $20 billion dollars worth. He refuses to invest in things that he does not understand and given the choice will choose an American investment over a 'foreign' holding almost every time. For the future though, times look rough for the dollar. Over the last few years, the major owner of US $ assets has been the national banks of Japan and China. If the dollar falls too far, these nations will stop buying (in truth, they might well have already) and start selling. (I have read this last week that the Bank of Japan has spent 90 billion over the last year buying foreign currency assets.) This could create a double whammy. If you are selling major holdings, you need to find a new home for the assets quickly. Where would you look? To rising assets, of course. So as the dollar is being sold, it will fall in value and that will create more selling. The euro will then be bought more heavily causing the euro to rise more strongly. It is simply supply and demand on a very large scale. How long might this last? When an asset becomes oversold, it may stay in such a state for weeks or months (even years in some cases). Is the dollar oversold? That much I doubt. The dollar is effectively the world currency, so every bank, fund, trust and portfolio will own some. As it becomes less and less profitable to own, they will sell. That is a lot of dollars floating about. It means in effect that monetary policy for the US $ is not decided in Washington any longer. Ironic isn't it that the World Bank, IMF and UN are all located in the US and have huge global reach and impact, yet the USA will struggle to control it's own currency. If there are things you wish to own that are sold only in America, it will soon be a very good time to buy all that you can. Do you often look on ebay or Amazon for things? Buying in dollars is become more attractive. Those rare items will effectively be on sale soon. The money spent during the family holiday in Florida will be far lower next year too in euro or sterling terms. Do you have US based assets that will be effected by this long term devaluation? Shares, mutual funds, T bills? If you have not repositioned your portfolio yet, every day you delay is costing you money. Should we be talking about this? * First published in January 2004 * To read more about the US economy, please also visit:
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