How To Profit From The Falling US Dollar

| May 18, 2009 | 0 Comments

This weekend I got a call from my uncle.  He recently switched jobs and now runs a small electrician’s office.  In the flurry of new paperwork, he realized his 401K was still sitting at his old employer.  He decided to roll it over to his new employer.

He’s a smart guy.  And he’s managed to save quite a bit of money.

We then focused our discussion on where he should invest now.  I’m not a financial planner, but with more than a decade of experience on “Wall Street”, I know the markets pretty well.  So what should he be looking at?

I started thinking about mutual funds, ETFs, stocks, bonds, the list goes on and on.

Sometimes contemplating all the macro-economic drivers influencing these investments becomes mind numbing.  So I started to break them down one by one:

Growth in China
The Recession
The Bank Bailout
The Collapse of Housing
Inflation
Deflation

And those are just the biggest ones right now.  So which is the most important?  What ideas should we be paying the most attention to?  It’s not just my uncle, it’s everyone.

Then it hit me.

Reaching into my pocket, I pulled out a brand-new crisp twenty-dollar bill.  And that got me thinking.  The US Dollar will probably be one of the biggest influences over our investments for the next 5 to 10 years.  Not many investors focus on the US Dollar but I do… and I know just how powerful it can be.

What do I mean by that?

I believe the US Dollar is teetering on the cliff of destruction.  I’m going to tell you why.  Then I’m going to tell you what happens when the US Dollar falls.

First, why will the US Dollar fall in value?

That one is simple… with a lot of complex reasons.  Let’s just focus on the most obvious… supply and demand.  The demand for US Dollars changes every day.  It’s the world’s reserve currency so it’s used around the globe for economic transactions of all types.

A few months back, demand for the dollar went through the roof. Investors were afraid of a global economic collapse.  They started shifting out of other currencies into the US Dollar.  Now that an economic collapse looks unlikely, investors are selling off US Dollars to buy other currencies.

With demand dropping, so is the value of the US Dollar.  But that’s not all.

Supply is jumping.  Before the recession, the Federal Reserve was holding the money supply relatively stable.  Now with the recession in full force, the government is giving away free money.  It seems anyone who can make their way to Washington and still have a pulse is getting a handout.  (Sometimes I think the pulse is optional – anybody can get free money.)

Trillions of dollars are being spent by our government.

Are they taking this money from a savings account?  No.  Of course not. Our government doesn’t have a rainy day savings account.  They’re simply printing more money.  It’s nice when you have the key to the printing press!

Remember all the money the US Treasury gave to the banks?

They just wired in a trillion dollars (give or take)… no need to print anything.  No actual money changing hands… just poof.  Here’s a trillion dollars.  Don’t get me wrong, it’s real money… but it’s increasing the number of US Dollars around the globe.

And that means more supply… which also depresses value.

If you follow my logic, you’ll realize the US Dollar is bound to slide in value.  And trust me, it’s a very slippery slope.  So aside from the obvious, selling off the US Dollar, how do we make money?

I can think of a hundred ways… but I don’t have enough room to describe them all.

So let me give you my best idea… invest abroad.

Take some of your hard earned US Dollars and invest them in foreign mutual funds or ETFs.  Think about it… by purchasing foreign investments, you in essence convert your US Dollars into a foreign currency.  Then you invest in stocks and bonds denominated in that new currency.  Even if the investments break even, once the US Dollar starts falling, you’ll be making money.

For example, I happen to like the idea of investing in China.  They have one the fastest growing economies on the planet.  Capturing a small part of that growth will do wonders for your portfolio.  One China-focused ETF I like is the iShares FTSE/Xinhua China 25 Index (FXI).  This ETF holds 25 of the largest and most liquid Chinese companies.

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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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