The dollar rose nicely in 2013, even hitting a five-year high against the yen last month. But there are good reasons to believe the greenback has further to go.
And that is good news for your stock portfolio.
When I started forecasting a higher dollar a few years ago, most readers were skeptical. You can hardly blame them.
The United States was the epicenter of the worst financial crisis in 75 years. Our central bank was printing $1 trillion a year. The government debt load was (and is) huge and growing. And the United States represents a shrinking share of the world economy, as China, India, Brazil and other emerging markets rise.
Of course, we’ve all heard these things before. What doesn’t get a sufficient airing is the good news… the reasons the dollar is and should be the foremost currency in the world.
Let’s start with our political system. Yes, we have a bunch of nattering yahoos in Washington who generally make a hash of things and value the future of the country only slightly less than their own incumbency.
But look at the larger picture. We are the world’s most stable democracy, operating under a single constitutional system for more than 200 years, ensuring the reliable and peaceful transfer of power. The U.S. military is the primary defender of the free world and our government plays an extraordinary role in world leadership.
We have the world’s largest economy and its deepest, broadest and freest financial markets. The greenback is involved in 87% of international currency transactions. Our free enterprise system is the source of our prosperity and the foundation of economic liberty.
Why should the dollar rise in 2014? The short answer is because things are getting better, not worse.
A slightly longer answer is the economy is now expanding at more than 4%. The unemployment rate just hit a five-year low. Home prices just hit a five-year high – and so did new home construction.
New technologies – hydraulic fracturing and horizontal drilling – are creating an energy revolution in this country. That, in turn, is contributing to a renaissance in U.S. manufacturing. The U.S. current account deficit – at about $400 billion – is roughly half of what it was in 2007. Higher Treasury yields are attracting foreign capital, too.
You have to scoff at those who say the U.S. dollar will lose its place as the world’s reserve currency. What is the alternative? Not the euro, a political experiment between powerful large countries and profligate smaller ones that may yet come apart at the seams.
Not the yen, the currency of a country that has fought a debilitating two-decade fight with deflation and whose budget deficit as a percentage of GDP is more than twice as big as our own.
Not the yuan, the currency of a Communist nation that doesn’t recognize the natural rights of its own citizens.
And not the Swiss franc. Although Switzerland is a fine example of fiscal probity, its economy (ahem) is slightly smaller than that of Massachusetts.
In short, there is no plausible rival to the U.S. dollar.
What’s It to You?
Why is a stronger dollar good for your portfolio? It keeps interest rates low. That, in turn, makes it cheaper for businesses, consumers and Uncle Sam to borrow. It also keeps a lid on inflation, the great enemy of both stock and bond investors.
A rising dollar attracts foreign capital too. When the dollar is up, an investment in U.S. stocks pays off two ways: an appreciation in the value of the equities and a favorable change in the exchange rate. Foreign investors, in effect, get a double plus.
For all these reasons, the dollar is likely to be king in 2014. And that’s good news, whether you’re traveling internationally or investing in domestic stocks.
View original at: Investment U
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