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Strategies for Stocks in a Weak Dollar Era (Part 1)

6 November 2007 - Features - Editor

It would be hazardous to make any firm predictions about how the dollar may far in future, but the chances of its weakening against other key currencies such as the Euro appear to be likely. Unlike the Chinese with their RMB and trade imbalance, Washington allows market forces to determine relative values of the dollar. That does mean the Federal Reserve has little indirect influence on dollar values because even minor adjustments in the interest rate cause cataclysmic shifts in flows of currencies in and out of portfolios.

Large corporations have armies of experts who do little else by way of work save predicting which way the dollar may move, and advising their managements to hedge their cash needs and reserves accordingly. What can small investors with just a few stocks do in such a set-up? A reasoned analysis of how the dollar may fare in the near future, target purchase and sale prices for targeted securities, daily monitoring of major geo-political events, and conscious hedging in case forecasts go wrong, are the major steps which people with just a few stocks can take, emulating stock markets giants. This approach is designed to optimize returns and growth of portfolios, rather than to offer any guarantees of maximization.

Global Effects of National Currencies on Domestic Stocks

The fundamental effects of currency valuation movements on stocks are easy enough for even a child to understand. Home currency devaluations benefit domestic companies that are primarily engaged in exports. This is why Chinese companies have benefited so much from the manipulation of the RMB by Beijing: they have grabbed global markets shares aided by their government. Conversely, domestic importers are hurt when their home currencies lose values: they have to effectively pay more for their purchases from abroad, while their domestic clienteles may demand old prices. U.S. manufacturers with high import contents in their purchases will suffer from a weak dollar, as American consumers will use free competition to deny matching price increases.

Life is rarely so simple: most stocks listed on major Exchanges have mixed business portfolios of imports and exports. All international dealing is not with a single foreign country, so multiple currencies come in to play. The net effect on stocks can be nearly impossible for outsiders to estimate, as most products and some services involve multiple components bought in various currencies, and sales to customers who pay in francs, Euros, rupees, and pounds-and some in dollars as well! Existing regulations do not force executives to share sensitive information on the net effects of a weak dollar to all holders of their stocks.

 


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