The Dollar's Fall -- Why You Need International Exposure

by: Roger Nusbaum

Roger Nusbaum submits: The chart of the dollar is ugly indeed. Longtime readers will know I have generally been a dollar bear but we have had almost a month of straight down:

This is not how markets usually work. I have written about some sort of correction that should come, but of course it hasn't.

Even the Icelandic kronur and the Hungarian forint, both tarred by current account deficit issues, have gained against the greenback.

I take the severity of the action and the reaction in foreign equity markets to mean that this is a re-pricing as opposed to a normal currency market gyration.

Perhaps this is a vote of no confidence in Big Ben, perhaps this is an expression of inflation worries or something else, but too much longer and this type of sharp weakness will be fundamentally negative for our trade partners (if it isn't already).

I think the moves in the kronur and forint (mentioned above) are significant because of how hated they were so recently.

Who knows how serious this will be, and maybe the dollar will turn sometime for no reason at all, but this is why you own some of the things I have been writing about all this time. Things are hitting the fan in some magnitude and a properly diversified portfolio owns a couple of things that can go up while most things go down.

UPDATE: I had a lot of comments left on this post:

One reader asked what I meant by re-pricing as opposed to normal market gyrations. I'll try to explain with an analogy. In May 2003 Genentech (Private:DNA) had huge news that took the stock from about $35 to $55 overnight. From there it went to $70 in very short order. The market re-priced the future significance of Avastin (the drug).

The things that threaten the dollar, the stuff that dollar bears have writing about forever, may have kicked up a notch with some new visibility toward what the Bernanke years might look like -- or maybe there is something else.

Another reader pointed to 80 as a line in the sand for the dollar index. Currently it is around 84. OK, lets keep an eye on 80.

RW asks whether at the same time it was taking away (raising rates), the Fed was also giving (adding liquidity)? I'm not sure about that in the current announcement but money supply has increased by more than 10%.

Roberto left a very dollar bearish comment and asked about the now forgotten (by the media) Iranian Oil Bourse. He asked for my take on the importance of oil trading in euros.

The Iranian bourse by itself is not a concern to me, because I don't think the world is going to line up to trade oil with Iran in this manner. I do view it as a start to something bigger. I think it creates a clear path to less global demand for US dollars.

This will lead to the need for a re-pricing of our currency. If this holds water, I would expect it to play out over several years, cause some discomfort (higher interest rates and a weaker dollar), but not cause financial Armageddon.

If this happens and the magnitude is worse than I think, it would cause a lot of things to get hit hard. The last couple of days have been very ugly. They could be a microcosm if the magnitude is bad.