Hang On For Mr. Dollar's Wild Ride

MSN Money February 28, 2012

2/27/2012 7:50 PM ET

By Jim Jubak

The next 2 years look to be difficult ones for currencies as the European debt mess upsets the euro and US budget woes trip up the dollar. Here's how to play them.

Currencies matter.

How much? Well, check out this calculation from the Financial Times: In simple, nonadjusted U.S. dollar terms, world stocks as measured by the FTSE All-World Index are just 7.5% below their post-Lehman Brothers crisis high set in the spring of 2011, and just 22% below their all-time high.

Seems like we're on the road to recovery in global equities, although this rally still has substantial room to run.

But look at the index -- tracked by the Vanguard Total World Stock (VT, news) exchange-traded fund -- in other currencies, and the picture looks very, very different. In Swiss francs, not U.S. dollars, the index is still 40% below its all-time high. In Japanese yen, the index is still 47% below that high. Measured against the price of gold, the index is down 65% from its all-time peak.

Why does this matter to you right now? Well, we all live in a world where what counts most isn't the nominal dollar value of any stock, but the real buying power of our portfolios. Gasoline, to take just the most obvious example, climbs in price when the dollar sinks. So, too, do the prices of copper and iron ore and all other globally traded commodities -- and the stuff that's made out of these raw materials, too.

How to trade currencies

In the short term -- let's say, for the remainder of 2012 -- thanks to the off-again/on-again Greek debt crisis, investors are in for some heavy-duty currency volatility.

In the long term -- let's say, beginning in 2013 -- I think investors can "look forward" to steady downward pressure on the dollar (unless you believe our politicians will magically turn into adults after the election and come up with a credible program to deal with the U.S. budget deficit).

Jim Jubak

All investors should be thinking now about strategies and timing for maximizing their real (instead of dollar-denominated) profits during this period. Your strategy as an investor needs to take both the short-term and long-term pictures into account.

Here's how I see the short-term volatility of 2012.

If the current Greek debt deal holds together -- and I think it will -- until the next report from the inspectors at the International Monetary Fund, the European Central Bank and the European Commission (known as the troika) in June results in a new set of demands that Greece can't or won't meet, then the euro will rally and the dollar and yen will fall.

Not heavily, mind you, because the euro still isn't a healthy currency. Even after the Greek debt deal, investors see it as a risky currency. But the need for currency safe havens will diminish, and that will mean selling of the safe-haven dollar and yen. The trend for those two currencies will be downward.

And we know what that means, right? We've seen this before, in 2011.

First, a falling dollar boosts the prices of commodities and commodity stocks. We can expect oil, copper and gold, to take just three commodities, to trend higher. That will push the price of commodity stocks up and provide some more upward momentum for stocks in general.

Commodities and commodity stocks won't be the only winners. U.S. and Japanese exporters will see the prices of their goods fall for customers who buy in euros (even if a recession in the eurozone reduces buying from that economy). That will lead to sales increases for companies such as Toray Industries (TRYIY, news) and Komatsu (KMTUY, news) in Japan, and Caterpillar (CAT, news) and Cummins (CMI, news) in the United States.

Currency effects don't end with the Big Three developed economies, either. Other safe-haven currencies, including the Swedish krona and the Norwegian krone, will also retreat. That will be a relief to exporters such as Sweden's SKF (SKFRY, news)that have been in danger of losing sales as their currencies appreciated. Currencies that will then look less risky, including the Mexican and Colombian pesos and the Brazilian real, will appreciate. In dollar terms, stock prices in those countries will climb even as exporters feel the pinch of currency appreciation.

Riding the deep currents

Exactly how big an effect any of this will have on share prices depends to a very large degree on the macroeconomic climate as we close out the first quarter and advance into the second. If the U.S. economy continues to hold to an annual growth rate near 3% (it grew by 2.8% in the fourth quarter of 2011) in spite of fears and predictions of a recession, then I think you'll see analysts up their estimates for sales and earnings from U.S. and Japanese exporters, and for revenue and earnings from big U.S. companies with big exposure to overseas markets.

A weak dollar means higher dollar-denominated sales when companies such as McDonald's (MCD, news) and IBM (IBM, news) translate euros and other rising currencies back into dollars for quarterly reporting.

The current overbought state of the U.S. stock market makes positioning a portfolio for this period very tricky. I don't think you want to add a lot of risk to your portfolio here, but you can certainly keep the risk of your portfolio at a steady level and still position yourself to take advantage of any potential outperformance from exporters and U.S.-based multinationals by shifting out of high beta stock into the shares of companies such as McDonald's (beta 0.44), or IBM (beta 0.66). (A stock with a beta of 1 moves up and down as much as the market. A stock with a beta of less than 1 is less volatile than the market as a whole. But it may outperform the market if something special about the stock, not related to direction of the market as a whole, gives it a boost.)

Or you can try adding a Japanese exporter or two, such as Komatsu or Toray Industries. Japanese stocks don't have much correlation with the U.S. stock market at the moment, and they are likely to dance to the tune of the yen rather than follow any other factor.

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5CommentsNewestOldestBestWorstControversial RGP13 hours ago

The U.S. and other developed countries devalue their currencies to benefit their exports then complain when imports like oil get more expensive. The speculators are watching our monetary policies and parlaying it into their investment strategies. I guess this is what too much central economic planning brings.

5 1ReportSpamMidnight Owl4 hours ago

The problem with this article is there is not explanation as to why a declining dollar effects the commodity prices mentioned (gold, oil, copper, silver,etc.) It is very simple, but if they make it simple, you don't need them to manage your portfolio so they can charge you exhorbitant fees to do so. I am a financial advisor, degreed in finance and journalism, and have found the more you educate clients on the why, they easier it is for them to trust you and pay you to manage their money. So here it is:

As the reserve currency of the world economy, the dollar is where prices are set. All the above mentioned commodities are priced around the world in dollars. So when the dollar declines, all other factors being the same, anything priced in dollar MUST increase. For example, if a barrel of oil costs $100.00 today and the value of the dollar declines by 5%, that same barrel of oil MUST increase in cost to $105.00. If the world supply is cut back, by a cartel that controls output, by 10 percent, add another $10.00 to the price of oil based on supply and demand.

These are simple economic principals, but they are not being taught in our schools to prepare anyone for life in the real world. These principals, by the way, apply to stocks, bonds and raw materials that are used to make computers, cell phones and Barbie dolls, too. Dollar valuation and the destruction of the currency is the most critical factor in turning this economy around. It doesn't matter if Caterpillar sells twenty percent more goods to the rest of the world when the dollar has declined by forty percent. That means they had a thrity three percent declined in world wide sales. Do the math and pay attention. Ben Bernanke and Timothy Geithner are the worst ever combination of Fed Chief and Treasury Secretary in the history of the Republic and should be impeached.

The book I am currently working on, "What you need to know to survive in this economy" will be finished and in book stores soon. Watch for it because everyone needs to know the basics.

13 3ReportSpamRivermud5 hours ago

Our economy was on an upswing, but now with the steady rise of fuel prices, people will have to choose between filling their gas tank or buying the things that aren't totally necessary to sustain a family. Now people will have to add to their credit cards every time they go to fuel up which costs approximately 75 dollars. It was nice while it lasted, but the great American Dream is once again under threat.

The ones that can least afford high fuel prices are the ones that will suffer the most..

5 3ReportSpammillionaireloving meet sexy lvoe6 hours agoLife is so lonely .I am a rich and single man at present .I need a woman who can love me back .I also uploaded my hot photos on,,,~Ｍ’illiｏn’airｅｌoving.С’ o M under the name of jeff1098..It’s the largest and best club for seeking CEOs, pro athletes, doctors, lawyers, entrepreneurs, beauty queens, fitness models, and Hollywood celebrities and so on.Please Check it out!Tanks for join....Some stories reveal major holes in the daily deals formula. The U.K.'s Telegraph newspaper ran a profile of a British cupcake owner who claimed that a Groupon deal nearly wiped out her business after she had to sell 102,000 cupcakes at a loss.dr75tg 1 8ReportSpamRay USA6 hours agoJubak is finally concerned about the dollar. The fact is: the value of our currency has a more fundamental impact on our financial well being than all the technical analyses that Jubak and others have been talking about for the last few years. The dollar has retained its value recently due to the problems of the Euro and due to the fact that most people have no clue how much inflation the Fed has built into our economy. When the dollar begins its fall, it will be very scary. Buy gold! 5 3ReportSpamAdd a commentReportPlease help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease use this form to notify the moderators. They will investigate your report and take appropriate action. If necessary, they report all illegal activity to the proper authorities.CategoriesSpamChild pornography or exploitationProfanity, vulgarity or obscenityCopyright infringementHarassment or threatThreats of suicideOtherAdditional comments(optional) 100 character limitAre you sure you want to delete this comment?/**/ DATA PROVIDERS

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And we know what that means, right? We've seen this before, in 2011.

Hang On For Mr. Dollar's Wild Ride

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