Dollar will rebound
Saturday, 10 November 2007

By D.K. 

You know the US Dollar is in a sad state when a Brazilian supermodel is demanding to be paid in Euros rather than the greenback.

The U.S. dollar has suffered a pretty sharp drop over the past five years -- it has lost 31% of its value versus the euro, 25% versus the pound, and, more broadly, 35% against a basket of the major foreign currencies. As an example, in 1999, the US Dollar was worth 81 Macedonian Denars, and today is worth 41. That's one mighty drop!

There are many reasons for the decline, including high oil prices, anxious U.S. credit markets, weak relative growth in gross domestic product, and a bulging trade deficit with the rest of the world. Moreover, capital has been flowing overseas in recent years, particularly to emerging-market countries as investors seek better growth opportunities

The winners and losers
But the falling dollar isn't all bad news. When the dollar is weak, U.S.-based multinationals such as Johnson & Johnson (NYSE: JNJ), General Motors (NYSE: GM), and Boeing (NYSE: BA) have a competitive price advantage over European competitors such as GlaxoSmithKline (NYSE: GSK), BMW, and Airbus. As a result, the European firms may need to lower prices to compete with the American companies in overseas markets. Meanwhile, in the U.S., foreign companies have to charge more in dollars to earn the same amount of foreign currency.

In recent years, U.S. luxury retailers such as Tiffany (NYSE: TIF), tourism companies such as Vail Resorts (NYSE: MTN), and consumer-goods firms such as Nike (NYSE: NKE) have benefited from the weak dollar. But the good times might not last forever.

They never do ...
It may take some time for the dollar to regain its footing. But at some point, the forces that have pushed the dollar down will reach equilibrium or even reverse the trend. In fact, according to the most recent report on global purchasing power parity (PPP) from the Organisation for Economic Co-Operation and Development, the U.S. dollar is undervalued by 21% versus the euro and 26% against the pound.

Theoretically, that should stimulate interest in dollar-denominated goods. And although trade barriers, transportation expenses, and inflation affect that process, such large price discrepancies will be difficult to sustain over the long term.

It's all about the Benjamins
It's been only five years since the strong U.S. dollar was causing problems in the international markets. Ironically enough, an October 2002 New York Times article called the dollar "seemingly unsinkable."

The point is that despite all of the adverse factors contributing to the weak U.S. dollar, we shouldn't forget that the currency markets are cyclical. The dollar will be strengthen, then weaken, and then strengthen again, ad infinitum.

That's why it's important to be properly diversified with both domestic and foreign stocks. When the dollar begins its next upswing, international firms that do a lot of business in the U.S., such as Italian furniture maker Natuzzi, will stand to benefit. Having both international and U.S. companies in your portfolio means you can make money regardless of which currency is strong and which is weak.

 



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