Falling Dollar’s Effect On Stock Market

| February 20, 2008 | 0 Comments

Lately, the US markets have been whipsawing back and forth.  Up 100, down 100, up 100.  It’s hard to find a trend in markets like these, but I’ve found one . . . the US dollar.  It seems like the US dollar has fallen every day for the last few months.

For some people this is causing quite a bit of worry.  Many investors believe this is the beginning stage of an economic collapse.  Others believe the weak dollar is perpetrated by nations seeking our demise through economic warfare.  Believe it or not, the US dollar is falling for legitimate reasons and it’ll be good for our economy in the long run.

So, why is the dollar falling?

The fall in the dollar is due to more people trading their US dollars for other currencies like the Euro, the British Pound, or the Japanese Yen. They sell one and buy the other.  Basic supply and demand.  But why are people selling the dollar?  Very simplistically, global investors want their money to be in growing economies earning good interest rates.

US interest rates seem to fall every time our Federal Reserve meets.  On top of that, since the subprime blowup became mainstream news, concern over the US economy has been front and center.  It makes sense.  Why stick around for a potential US recession when you can earn better interest rates in the Euro, the British Pound, or the Australian Dollar?

The myth exposed.

When other economies like China, Australia, and Europe, were growing strong, some investors started believing in decoupling.  Decoupling is the belief that foreign economies are no longer tied to the growth in the US Economy.  Despite years of contrary evidence, they decided that foreign economies would be immune to an economic downturn in the US.  They’ve got a lot to learn if they truly believe that.

Just look at Great Britain.

The British economy has started suffering from the same economic shock that we are experiencing.  Their real estate market is tumbling, and the banking sector is starting to crack.  As a matter of fact, the Bank of England and HM Treasury just nationalized Northern Rock, one of their biggest banks.

So, since our economies are closely tied together, the slowdown in the US economy will trickle down into other economies around the world. They may not enter a full blown recession, but a slowing economy will cause their central banks to do the same thing our Federal Reserve is doing . . . lower interest rates.

Why this is good for the US.

Remember, money will flow into countries where it can earn the highest interest rates.  As a result, when foreign rates are lowered, US rates become more attractive.  You also have the safety factor.  Investors all around the world see the US markets as a safe haven.  Up until now investors were greedy.  They moved their money into investments that paid the highest rates of return with little concern for safety.  Now with the decoupling myth exposed and global fears of an economic slowdown setting in everyone is seeking safety.

Traditionally, the safest place in the world for investment is the US economy.  We have the greatest economic infrastructure, the most developed capital markets, and our property rights are clearly defined.

What will happen next?

As investors seek out safe havens in the economic storm, the US will be their first choice . . . economic slowdown or not.  As a result money will start flowing back into undervalued US markets.  As this happens, investors will sell other currencies to buy the US dollar, causing it to rise over time.  This turnaround won’t happen overnight.  You won’t see it start until the Federal Reserve stops cutting rates and the economy starts to stabilize.  Once that happens, you will see the tide in the US dollar change significantly, and the capital markets start to rise.

In summary, the falling dollar will not lead us to economic failure or a massive depression.  If anything it makes our markets look undervalued compared to the rest of the world.  As an economic slowdown starts in other economies, investors will flock to the safe harbor of the US markets.  You can bet on it.

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Category: Currency Trading

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The Dynamic Wealth Report works with a number of staff writers and guest experts who specialize in everything from penny stocks to ETFs to options trading. These guest analysts post under the 'staff writer' moniker for ease of use.

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