Dollar Rally Changes Investment Landscape

The following was excerpted from Sitka Pacific Capital Management's client letter for September 2008.

One of the most consistent themes since 2001 has been the decline of the US dollar versus other major currencies. Whether is was against the European Euro, the Australian dollar, or the Chinese Yuan, most major and many minor currencies rose dramatically against the dollar over the past seven years.

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However, in only a few short weeks in August, the dollar began to rally strongly against almost every other major currency and took back all the losses from the over past year—and them some. You can see this gain by the large white candle on bottom right side of the above chart. It was the largest gain in since the dollar bear market began, and it also encompassed a number of key currencies not represented in the dollar index—such as the Russian Ruble and the Brazilian Real.

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The likelihood of a continued rally in the dollar, coupled with the prospect of relative outpeformance of US stocks versus foreign markets, leaves us with an investment landscape almost completely opposite of what we have faced since 2001.  If this new paradigm continues to strengthen in the months ahead, dollar-based investors will do best by concentrating on their home turf instead of looking outside the US for investments.

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However, until the bear market ends, a rising currency and weakening domestic and global economies leaves dollar-based investors facing an extremely deflationary market environment. With US stocks, foreign stocks, commodities, and foreign currencies all falling together, there is a far smaller range of potential areas to invest in that offer the prospect of positive returns.

Comments

[carey_jim:]

The dollar us up around 10% against the Euro from an all time low reached at the end of June.

Looking at the chart from 1999 to the present, the recent dollar rally could easily be interpreted as just noise from the cheer leaders around the world who want to see a stronger dollar.

But wanting isn't always getting.

We seem to be in a tug of war between the "authorities get what they want" groups and the free market groups.

The truth is somewhere in between, of course, as it always is. The trick is knowing where.

2008 Sep 18 10:48 AM