Wednesday, November 21, 2007

Dollar Decline: OK, It's Getting Crazy

Me and my family are on an international vacation and over the past week have experienced first hand the pain inflicted by a declining Dollar. The Dollar has declined against the local currency by about 15% in the last 18 months or so, and this means that everything we buy during our visit is noticeably more expensive in Dollar terms than it was last time we were here. This doesn't only make international travel more expensive, the same "problem" exists for Americans buying imported goods at home. Our money now buys less of everything, pretty much everywhere around the globe.

Of course, the story is not all bad. The declining Dollar is a boon to American exporters, who are now more competitive in the international market place. American goods have become cheaper for foreign buyers, and as this trend continues it may mean that the U.S. trade balance will improve significantly.

As an investor, the Dollar's decline poses some real dilemmas for me. I have previously written about how to defend your portfolio from the impact of a cheaper Dollar, but the main strategy for doing this is international diversification. Our portfolio already contains about 30% international stock, and given the frothy (not to say bubbly) state of some of the international markets out there, an increase in this position makes me somewhat uncomfortable. In addition, I believe that the world economy is headed for some tough times. With oil at about $100 a barrel and signs of inflation breaking out in China, I think we are going to see much more turbulence in the world economy in the coming years. I am not quite sure that I want to increase my exposure to this turbulence.

One thing seems clear to me: the Dollar will continue to decline in the near term. Talk of the Fed further reducing interest rates; an increased chance of recession; and international discussions about diversification away from the Dollar have created an atmosphere which will probably continue to put pressure on the Greenback. It seems to me that some sort of psychological barrier has been broken and that the world is willing to accept continuing declines for our national currency. We are in for some interesting times. I am not sure that they are going to be interesting in a good way.


plonkee said...

As I'm just about to go on holiday to the US, I've got no sympathy.

Encouraging people to diversify overseas is probably a good thing though, so every cloud has a silver lining.

Me said...

All the more reason to get out of debt ASAP, right? Earlier this year I updated the fund allocation in my 401(k) to include more (about 30-35%) international stock in diversified index funds. In your opinion, what else should we be prepared for?

Borger said...

Quite a few old friends and colleagues have actually gone so far as emigrating and getting set up in a Euroarea country. Especially if you're a trained professional and particularly in sci-tech, you get the most mileage (kilometrage?) working in a place where you get paid in Euros.

Germany seems to be #1 choice for young professionals from North America (or Australia)-- good strong economy overall, Eurozone leader, lots of high-tech, among the best schools in the Western world *and* they're basically free of charge, paid by tax dollars. Obviously you have to learn to speak pretty good German, but a lot of us in tech have to know it anyway to read (and write) good tech literature, and besides, German's actually easy-- a lot like English and you pick it up with practice.

Otherwise, I've known a few people head to Italy, Austria or France depending on language skills, but just working as a professional in Germany seems to be the best career move. Certainly the best return on investment.

Shadox said...

Borger - I don't know if I would go quite as far as leaving the country, but I understand the economic motivation.

Me (nice screen name) - I think other than building a strong position in international stocks (which you have done), and making sure that your U.S. portfolio is well diversified, there is not much more you can do... unless you want to take Borger's advice... diversifying into a small commodities position, might also be a good strategy, but commodities prices are pretty high these days and may reverse position if the global economy turns south. From this point forward it looks like it may be time to hold on tight and enjoy the roller-coaster...

frugal zeitgeist said...

Ugh. One more reason I'm comfortable with my decision to attack the mortgage in a big way. Enjoy your vacation with the family!