The US dollar has a very high valuation. A quick look at the dollar index shows this very clearly. At 96.7030, the US dollar has a very high valuation. Investors should be aware that the dollar index is heavily weighted in favor of the euro. There are six currencies included in determining the dollar index:
- Euro (EUR), 57.6% weight
- Japanese yen (JPY) 13.6% weight
- Pound sterling (GBP), 11.9% weight
- Canadian dollar (CAD), 9.1% weight
- Swedish krona (SEK), 4.2% weight
- Swiss franc (CHF) 3.6% weight
The safe-haven currencies that are currently in vogue are the Japanese yen and the Swiss franc as they appear to be the most stable. In the 1960s, 1 (one) US dollar was worth 4 (four) Swiss francs. Today, the US dollar and the Swiss franc are practically at par. The euro may weaken further, and the pound sterling may fall depending on how Brexit is carried out. The Canadian dollar depends very much on Canadian mining and oil production, while the Swedish krona is under pressure due to the large expenditures due to welfare payments to the migrants. The Chinese renminbi does not figure at all in the US dollar index.
The point here is that the dollar still has a high valuation. It is well known that this high valuation is due to the US dollar being the principal central bank reserve currency and that the petrodollar is the most used currency for oil transactions. The SWIFT international payment system is based on the US dollar. This has resulted in the US dollar being employed in about 85% of all Forex transactions. It is probable that the US dollar is going to continue being the main international currency for some time, but it is not clear for how much longer the US dollar is going to maintain its privileged position.
The problem is that China, India, and Russia, as well as other countries, are bent on replacing the US dollar as the main international currency. They are heaping up large amounts of gold, and the idea may be to institute national gold-backed cryptocurrencies to compete with the US dollar. This is really speculation, but they are definitely working towards the goal of avoiding the US dollar in international transactions. See our recent Seeking Alpha article about the threat to the US dollar: "Swap Agreements Threaten U.S. Dollar Dominance". Every swap agreement will mean less demand for the US dollar. There has been a lot written about this and the US dollar in general. A Google search will produce about 1,290,000,000 results for the US dollar. Investors can save themselves a lot of time by following the advice given in this article.
There are, in fact, many reasons why the US dollar is heading for a fall. The weaponization of the US dollar and the applications of sanctions placed on several countries have made it clear to the global community that the US uses the US dollar as a tool to further its geopolitical goals. Investors should avoid investing in China, Cuba, Libya, North Korea, Iran, Iraq, Russia, South Africa, Syria, and Venezuela as these countries are likely to make it impossible for American investors ever to get their money back. China, India, and Russia are working together to forge a new trade block even if India is a bit reluctant in as much as Pakistan is also in the mix. These geopolitical developments will have a powerful impact on the demand for US dollars as noted above in relation to swap agreements. The institution of an oil futures market in Shanghai on the part of the Chinese is a step towards dethroning the petrodollar in the oil sector. The anti-dollar movement is gaining momentum.
One thing that US investors can do in anticipation of a fall in the value of the US dollar is to buy physical gold. Another possibility is buying gold mining stocks that react strongly to price changes in gold. The gold price has recently topped $1,380.00 per ounce. Cryptocurrencies could be a possibility, but it is not clear which ones will survive. In the event that China, India, and Russia start working with national cryptocurrencies based on gold, however that may be organized, other cryptocurrencies may lose out.
Another way of avoiding loss due to a weakening dollar is to invest in other countries, which means buying their currencies in the Forex market and setting up an account either with an American bank if that is possible or setting up an account with a foreign bank in the currency of the country that one plans to invest in. Since the US dollar is still flying high, so to speak, investors can still buy a lot of foreign currency with US dollars. One example is Chile. The Chilean peso is still cheap for American investors.
Of course, investors should do their homework before buying foreign currencies and then making investment decisions. At the moment, Iran is not a good idea for American investors nor is Syria. There might well soon be war with Iran, and Syria is already a war zone. In fact, each individual country merits an article that discusses the advantages and disadvantages of investing in that particular country. We plan a whole series of articles that will examine the feasibility of investment in particular countries. The purpose is to buy foreign currency while the US dollar is still worth a lot and much more than it will be once the anti-dollar movement gains traction. The second step is making investment decisions. As always, Caveat emptor (Latin for "Buyer beware").
What is going to happen to the US economy when the US dollar falls in value is a completely different topic and could be the subject of another article. Imported goods will become extremely expensive for Americans not because of tariffs but because the dollar will buy less. American companies that have located production facilities outside the US are going to have enormous problems when they try to import their products into the US. If there still are tariffs on foreign goods in place, then the fall in the value of the US dollar will have as a result the importation of inflation. This will be due to the fact that imported goods will cost a lot more. At a certain point, it might become more interesting for companies to relocate production facilities to the US because it would then be cheaper to produce the goods in the US. At the same time, it would be easier for American companies to sell goods abroad because the prices of American goods would be competitive at a global level.
The effect on the living standards of American workers would be devastating because of the imported inflation. American workers would become poor like the workers in developing markets. American companies and investors that had investments in foreign countries would do well since their dividends would be worth more in US dollars.
It is difficult to predict what would happen to American capital markets in the event of a sharp depreciation of the US dollar. Foreign investors might decide to stop buying American debt because they feared a loss in the value of their capital. This could result in monetization of the US federal debt on the part of the Fed.
In the event that China, India, and Russia, as well as other countries did try to establish gold-backed national cryptocurrencies in an effort to circumvent the US dollar, the Treasury might resort to establishing a gold-backed US dollar cryptocurrency. In that case, an audit of American gold reserves would become imperative. American authorities have been reluctant to allow any auditing of gold reserves, and it is not clear how much gold there really is in Fort Knox. Despite what economists say, there are many people that believe that gold somehow has to be connected to currencies. The US dollar is not going to escape being involved in future developments in global currencies.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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The comments, opinions, and analyses expressed herein are for informational purposes only and should not be considered individual investment advice or recommendations to invest in any security or to adopt any investment strategy. Because market and economic conditions are subject to rapid change, comments, opinions, and analyses are rendered as of the date of the posting and may change without notice. The material is not intended as a complete analysis of every material fact regarding any country, region, market, industry, investment or strategy.
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