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.