The dollar’s collapse – what it means

A lot of good material has come out recently to illustrate the U.S. dollar’s decline and what it might mean for investors. Here are a few particularly worthwhile pieces.

– First, some perspective. David Singer’s annotated long-term chart of the USD Index shows that while the recent drop has been steep, it’s nothing compared to what happened between 1985-1992. Click to enlarge:

– On NPR’s Planet Money, Jacob Goldstein lays out the upside of a weak dollar. In short, it’s good for American companies that export heavily, and that could spur domestic top-down growth:

It makes U.S. exports cheaper, which encourages people and businesses around the world to buy more of our stuff. Increasing exports is key to increasing U.S. economic growth without relying too heavily on domestic consumer spending.

– On a more alarmist note, Liam Halligan of The Telegraph warns that if the Fed’s dollar dilution puts the greenback into outright freefall, that could be the spark of the next global financial crisis:

A plummeting US currency would also spark broader chaos as central banks sought to protect the value of their reserves. And after the inevitable downward overshoot, the dollar would snap back, causing the carry trade to “unwind” as dollar borrowers suddenly owed more. The danger then would be that major losses at financial institutions posed renewed systemic threats. Financial markets might then go into a tailspin, reigniting concerns of a fully-blown global slump.

– Warren Buffett, at Saturday’s annual meeting of Berkshire Hathaway shareholders, said there’s “no doubt” that the dollar will continue to weaken – but despite that certainty, he is not putting on more bets against it:

A few years ago, Berkshire had a significant “short” position on the dollar, amounting to a multi-billion-dollar bet on the currency’s decline. On Saturday, Buffett said the company hasn’t really been active in foreign exchange lately.

“There’s no question the purchasing power of the dollar will decline, but I think the purchasing power of many currencies around the world” will also decline, he said. A short position, he explained, would reflect an expectation that the U.S. dollar will decline at a faster rate than other countries, and he doesn’t have a strong view on whether that would occur. Hence, “we’re unlikely to make a big currency bet,” Buffett said.

–  hedgefundinvest comments on the weak USD and the power that has on equities:

QE2 is midprocess of flooding the market with dollars.  Treasuries are being monetized at a record rate. The system has less US Treasuries (all else being equal, which it is not), and more dollars sloshing around.  What happens when a dollar is worth less, and known to decrease in value? Folks get rid of dollars, and buy other things, either as something to consume (cars, iPads, food, etc.), or they invest it (gold, silver, stocks).

– Finally, Ben Levinsohn and Jessica Silver-Greenberg in the WSJ have some thoughts on how investors may profit from the shrinking dollar – via stocks, bonds, commodities and currencies. In the stocks department:

A slumping dollar historically has been good for stocks. The classic stock play during periods of dollar weakness is large-cap companies that export heavily: Companies in the S&P 500 index derive nearly half of their revenues from abroad, notes Howard Silverblatt, senior index analyst at Standard & Poor’s.


“Annotated US Dollar Index”, 4/29/11, David L. Singer [Data:]

“The Upside of a Weak Dollar,” Jacob Goldstein, Planet Money, 4/29/11

“America’s reckless money-printing could put the world back into crisis” Liam Halligan, The Telegraph,4/30/11

“Buffett on the Dollar, Gold and Oil” The Wall Street Journal, Deal Journal, 4/30/11

“What’s a buck worth” hedgefundinvest, 3/5/11

“How to Profit from the Shrinking Dollar” Ben Levinsohn and Jessica Silver-Greenberg, Wall Street Journal, 4/30/11