Four Ways to Beat the Dollar’s Woes

12/06/2007 12:00 am EST

Focus: GLOBAL

Jim Jubak

Founder and Editor, JubakPicks.com

James Jubak, senior markets editor for MSN Money, says the dollar's weakness will last a while, and he suggests some ways investors can compensate for it.

The crisis in the US financial industry and the plunge in the US dollar is a combination far more damaging than either alone. US stocks and the dollar are being pummeled by a perfect storm-and the damage is far from over.

By itself, the plunge in the dollar would be enough to send the US financial markets reeling. Against the euro, the dollar is down a startling 20% since the beginning of 2006. The story against the currencies of other US trading partners is just as bad or even worse.

Overseas investors are faced with unattractively low interest rates, unattractively low (or negative) returns on stocks and a falling dollar that means they will lose money in their home currencies even if US stocks hold steady.

What could put an end to the dollar's plunge?

  • An increase in US interest rates? That's off the table as long as the US financial sector is in turmoil, the US housing industry is in the dumps and the US economy is in danger of slowing.
  • An increase in returns from US stocks and bonds? That's not likely, [either, for the same reasons]. 
  • Lower returns in competing overseas markets? Not yet, anyway. But it's quite possible in the longer run if the economies of China, India, and elsewhere still catch colds when the US economy sneezes (new theories that say otherwise might be wishful thinking).

So what's the poor dollar-denominated investor to do? I've got four suggestions:

  • Think like an overseas investor and put your money into hard assets or strong currency assets. In the first group: gold, silver, iron mines, oil, etc. In the second group: Canadian and Australian stocks, and Indian and Chinese real estate.
  • If exports are enough of a company's revenues-or if the company is in a position to expand its exports rapidly-the gains to the company could be enough to make up for weakness in the US economy and for overseas reluctance to buy dollar-denominated equities.
  • Think long term. We could be in for a good long period when the dollar is stable at a relatively low exchange rate and profits of US exporters soar. As overseas investors discover that dollar-aided profit boom, the US stock market will start to outperform again, attracting more overseas investment and resulting in more outperformance. Virtuous cycles sometimes follow hard on the heels of vicious cycles.
  • And finally, stay calm. Many of us have been looking for a 10% correction in the market as a whole for months now. I've argued that stocks have moved up too far, too fast from the August low and that we need some short-term pain to set up the market for the next stage of its rally. It seems silly to panic when we're getting exactly the medicine that the market needs.

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