Tuesday, July 21, 2009

The Dollar is Overvalued... But Against What?

Investment Postcards details why the dollar is in jeopardy:

David Rosenberg, chief economist and strategist of Gluskin Sheff & Associates, points out that there is one policy tool that is practically unchanged since two years ago … the US dollar. “It is the only policy tool that has not budged one iota since the crisis erupted two years ago. But we are sure that as the unemployment rate makes new highs and increasingly poses a political hurdle in a mid-term election year, it would make perfect sense for a country that always operates in its best interest - even if it may not be in everyone’s best interest - to sanction a US dollar devaluation as a means to stimulate the domestic economy,” he said.
Makes sense, but lets look at the other side of the coin (needed a currency pun in there). If the U.S. were to intentionally devalue the dollar, not only would that mean we were willing to piss off China (a country we seem to be rather reliant on in any recovery story), but it would also mean other developed countries were not, in fact, attempting the same thing (call it the paradox of devaluing - all currencies can't be worth-less against one another).

In addition, according to the very official Big Mac Index (via Credit Writedowns) the dollar is already rather weak as compared to a number of "developed" currencies..

Which leads David to the following recommendation:
That investors should start thinking about protecting their portfolios against a declining dollar by taking positions in commodities, gold, the Canadian dollar, resource stocks and US sectors that have high foreign exposure (materials, industrials, staples, health care).
In other words, if you believe in a weak dollar going forward, don't invest in other currencies... invest in hard assets.


  1. People have often asked me of what would happen if we were to wake up one day and find out that the US had devalued the dollar by 50%.

    My response. "Poof. You hear that? That was just all the other central banks countering your action. The net effect was essentially zero."

    Really. If the US was foolish enough to try something like this, how long do you think it would take for the Europeans to counter? 10 minutes? 20?

  2. Jake,

    Makes sense, but lets look at the other side of the coin (needed a currency pun in there).

    Makes sense? If you had said "makes cents worth less", you could have had two puns in there.

    Oh boy, now I'm puntificating. D'oh!

    All joking aside, I don't think they will trash the dollar. It would completely roil world markets. Plus, the dollar is arguably our most valuable franchise.

  3. The strength of the South African Rand this year has been amazing.

  4. I've argued that for ages - especially to the Peter Schiff followers. Japan and the EU are in rough shape too and the remaining currencies are too small to matter much in the global economy. CAD makes sense if you're Canadian, but less so if you live and work in the US.
    I find it truly baffling - that Americans are so paranoid about the US dollar. Heck, if you're in exports it'd be a *good* thing.
    This might sound a bit tin-foil hattish, but consider this: staying in cash (or if worried about inflation, TIPS) doesn't generate much in the way of fees for the financial services industry. Introduce a little dollar paranoia and suggest costlier places for a person to put one's savings into.