| At a time when the US housing market is | | | | important. Canadian drugs for example may not |
| contracting, the job market is deteriorating | | | | be as much of a bargain as they use to be. |
| and consumer spending is at risk, the US | | | | The same is true for European handbags and |
| economy needs a weaker dollar. This is the | | | | other luxury items. |
| primary reason why we do not expect the US | | | | |
| government and the Federal Reserve to stand | | | | 2) Tighter Monetary Policy - Higher costs for |
| in the way of further dollar weakness. | | | | foreign goods imports inflation which is why |
| | | | a weaker currency in general is inflationary. |
| Benefits of a Weaker Dollar | | | | With oil prices hovering around $80 a barrel |
| | | | and the dollar falling through the floor, |
| 1) Increased Exports - One of the biggest | | | | inflation is sure to pick up in the coming |
| reasons why a weaker dollar will help the US | | | | months. Martin Wolf of the Financial Times |
| economy is because it increases the | | | | makes a fantastic point when he said that |
| competitiveness of US goods. It boosts | | | | "The resolution of each crisis lays the seeds |
| foreign demand while keeping US consumer | | | | of the next." In order to get out of a |
| demand domestic. Over the medium term, this | | | | crisis, the Federal Reserve will usually |
| benefits the sales of US corporations which | | | | lower interest rates aggressively. We saw |
| will eventually translate into more jobs and | | | | this after the Asian and Russian crises of |
| consumer spending. It also helps to reduce | | | | 1997 and 1998. This eventually led to |
| the trade deficit, one of the most criticized | | | | bubbles in the financial market, forcing the |
| aspects of the US economy. | | | | Fed to hike interest rates. Although |
| | | | inflation is not a huge problem at the |
| 2) Foreign Investment - There are three | | | | moment, the threat of inflationary pressures |
| different ways that foreign investment can | | | | could prevent the Fed from lowering rates as |
| help the US economy and the US dollar. Over | | | | much as they would have otherwise wanted or |
| the past few years, foreigners have been big | | | | needed. |
| buyers of US real estate. According to a | | | | |
| study by the National Association of | | | | 3) Foreign Travel Becomes More Expensive - |
| Realtors, about one in five American real | | | | From a consumer level, the weakness of the US |
| estate agents sold a second home in the year | | | | dollar makes foreign travel more expensive, |
| ending April 2007 to a foreign buyer. A | | | | particularly to countries like Europe and |
| third of these buyers come from Europe, a | | | | Australia. Since the beginning of the year, |
| quarter from Asia and 16 percent from Latin | | | | the Australian dollar has appreciated more |
| America. As the US dollar continues to fall | | | | than 10 percent against the US dollar. |
| in lockstep with house prices, foreign buyers | | | | Because of nothing other than currency |
| could provide the support that the US housing | | | | fluctuations, travel to Australia has become |
| market needs to avoid a major crash. The | | | | 10 percent more expensive. The same is true |
| second support would be in the form of value | | | | for travel to Europe except for the fact that |
| hunting in the US equity markets. If the | | | | the move is smaller on a percentage basis. |
| dollar continues to fall, foreign investors | | | | |
| may begin to load up on companies with sound | | | | Can the US Dollar Fall Further? |
| fundamentals that are also less vulnerable to | | | | |
| a US economic slowdown. Both of these factors | | | | The answer is yes. A trend in the currency |
| are contingent upon the US dollar showing | | | | market can last far longer than many people |
| signs of stabilization. Foreign investors | | | | would otherwise expect. We have seen one way |
| will only swoop in with size when they | | | | directional moves last for months and in some |
| believe that dollar weakness is nearing an | | | | cases, even years. Interest rate outlooks |
| end. The third factor is less contingent | | | | play a major role in the future direction of |
| upon the outlook for the US dollar. A weaker | | | | currencies so with the market pricing in |
| dollar also makes US corporations more | | | | another 125bp of easing by the end of next |
| attractive buyout targets. Sovereign wealth | | | | year, the US dollar could easily fall to 1.50 |
| funds of countries like China and Dubai are | | | | against the Euro. This is especially true if |
| flush with cash and are on the lookout for | | | | the ECB remains nonchalant about the Euro's |
| good investment opportunities. | | | | move. At some point, the benefits of a |
| | | | weaker dollar such as increased exports and |
| 3) Increased Tourism - Tourism represents a | | | | foreign investment will help to turn the US |
| big part of the US economy. It supports | | | | economy around, at which point the dollar |
| employment for over 5.4 million workers and | | | | will begin to rise once again. |
| generates over $550 billion in annual | | | | |
| revenue. Canadians represent the biggest | | | | What Does This Mean for Your Investments? |
| group of travelers into the US. We expect | | | | |
| their share to rise even further now that the | | | | Regardless of whether you are actively |
| Canadian dollar is trading at parity with the | | | | involved in the currency market or monitor it |
| US dollar. In the beginning of this year, a | | | | at all, the value of the US dollar or |
| USD$250 hotel room cost CAD$295, now it only | | | | currencies does matter. Companies that do a |
| costs CAD$250, which represent savings of | | | | lot of foreign sales will benefit the most |
| over 15 percent. Although the savings for | | | | because their foreign currency revenue will |
| Europeans are not as large, they too will see | | | | be higher when repatriated not because they |
| anywhere between a 5 to 10 percent discount | | | | sold more goods, but because their earnings |
| in travel costs. More tourism is always good | | | | from currency conversion will be larger. The |
| for an economy. | | | | industries with the greatest foreign sales |
| | | | exposure are energy, technology and consumer |
| Disadvantages of a Weaker Dollar | | | | staples. Companies that produce commodities |
| | | | usually also benefit from dollar weakness |
| 1) Higher Costs for Foreign Goods - The most | | | | while the companies that will be hurt the |
| immediate disadvantage of a weaker dollar is | | | | most are big importers. If you have a view |
| the increased costs for foreign goods. With | | | | on where the US dollar is headed or want to |
| a trade deficit of $59.2 billion, US | | | | hedge against some of your stock market |
| consumers import far more than they export. | | | | exposure, the purest way to do so would be |
| The number one country that the US imports | | | | through trading or investing in the US dollar |
| from is Canada, which is why the recent | | | | directly in the currency market. |
| strength of the Canadian dollar is so | | | | |