The U.S. dollar, as measured by the Dollar Index (DXY) against a basket of six global currencies including the euro, the Canadian dollar and the yen, is at its highest level since September with a reading of around 82. A gain of just 3% or more would push the DXY index to above 84 and its highest level since 2010.
It seems like there’s nowhere but up for the dollar … but why? Aren’t federal spending problems a serious issue to the creditworthiness of the United States? And isn’t the Federal Reserve’s easy-money policy at risk of devaluing the dollar and sparking inflation?
Well, according to popular growth investor Louis Navellier it’s less a case of the dollar being strong as it being the least bad alternative in a rocky market.
“Even though the British pound recently hit a two-year low after its credit downgrade, the euro stumbled after Italy’s chaotic election and the yen remains weak, the U.S. dollar cannot rally significantly,” Navellier told me. “With zero-percent interest rates, $85 billion per month in Fed pumping, a flat yield curve and trillion-dollar deficits as far as you can see? Plus sub-par GDP growth?”
Not happening, says Navellier.
“The U.S. dollar rallies when folks get scared, like [this week’s] Italian election reigniting eurozone crisis fears. However, when all the dust settles, capital will move to where rates are higher, like Canada, Australia, Korea, New Zealand, Brazil, Thailand and the euro.”
The solution, then, is to seek out multinational and international investments that profit from a weak-dollar environment — stocks like payment processor Visa (NYSE:V), which is growing fast in emerging markets, and Latin American beverage giant AmBev (NYSE:ABV). Other good places to hide out are commodity-focused investments like Ecopetrol (NYSE:EC) or refiner Marathon Petroleum (NYSE:MPC) that naturally see their prices firm up in a weak-dollar environment, since dollar-denominated commodities like oil see price inflation when the greenback fades.
Navellier is recommending all of these stocks in his Blue Chip Growth newsletter.
In fairness, many folks have been talking this talk for a while and the dollar hasn’t crashed. The full faith and credit of the U.S. government remains very attractive in uncertain times, and the dollar remains the world’s reserve currency of choice for a reason. The many rounds of quantitative easing and ZIRP policies since 2009 haven’t driven people out of the dollar yet, so it may be unrealistic to think that investors will give up on the greenback now.
Furthermore, last week the Federal Reserve shook investors with talk about perhaps tightening central banking policy earlier than expected. Raising rates or stopping bond buying at the Fed would cause the dollar to go higher, not lower. And inflation remains handily under control at a roughly 2% annual pace. That’s hardly the kind of hyperinflation that encourages a dollar crash.
Still, many investors including Navellier are positioning themselves for a weak-dollar environment in 2013. Investors who agree with them should look to multinational, global and commodity investments to hedge their bets against a dollar’s decline.
- Thanks to dramatic easing of central bank policies in Japan, the yen is trading at a 33-month low vs. the dollar. (Investing.com)
- The pound recently hit a two-year low after a downgrade of UK debt from credit ratings agency Moody’s (NYSE:MCO). (FT.com)
- What the Italian upset means for the euro. (CNBC)
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.