December 7, 2006 – I must pre-qualify this blog entry as I’m writing it from a café, that unlike previous blogs about the direction of the U.S. dollar, I have not looked at any technical charts regarding the current weakness of the dollar before writing this. However, I will say that as weak as the dollar is (and trust me, anyone, American, Spanish, Cuban, French, German and so on, knows how much the dollar has fallen if you own any dollars at all), I believe that the dollar has much further to all. Not a just a little bit, but a LOT more. I know, sorry, that’s terrible news for all you dollar holders out there.
But let me now qualify that statement above. I don’t believe the dollar will go the way of toilet paper overnight. In fact, it’s possible, more likely even probable, that the dollar will experience temporary episodes of strength. Since the dollar has been overdue for a pop higher, I wouldn’t be at all shocked if we receive one soon. However, none of these episodes of strength will come close to matching on the upside, the precipitous falls that it has recently experienced. Furthermore, a temporary bump higher, when and if it happens, will by no means mark a trend reversal. The dollar is firmly set on a downward path for the long term and the even longer term. The Fed has a decision to make.
In Asia and South America, as local currencies have strengthened significantly against the dollar, exporters have complained loudly about their inability to compete due to the dollar’s weakness though their complaints have for the most part, fallen on deaf ears. A weak dollar helps the U.S. in that it makes American goods more attractive to the foreign market and will help close its massive trade deficit. However, in order to put much more than a tiny cosmetic dent in this massive deficit, the dollar needs to weaken much more than even its current pathetic state. And this, I believe is the most likely scenario that will happen.
So what should you do about this problem? From a personal wealth perspective, holding dollars will just make you poorer in the long term. Many people don’t factor in the erosion of purchasing power from currency into their wealth but they should. If you own a lot of dollars and your investment portfolio or business profits have increased in the past couple of years by 40%, but your purchasing power has decreased by 15% because of the incredible shrinking dollar, this loss of purchasing power is a tangible loss in wealth.
So consider converting your dollars to anything but dollars if you already haven’t done so — gold, silver, Euros and Pounds Sterling.
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J.S. Kim is the founder and Managing Director of maalamalama, a comprehensive online investment course that uses novel, proprietary advanced wealth planning techniques and the long tail of investing to identify low-risk, high-reward investment opportunities that seek to yield 25% or greater annual returns.
