U.S. Dollar Weakness

Last week I had a very surprising conversation with a stock broker at Citibank. He told me he did not understand why the U.S. Dollar was so weak. The same week two people asked me for advice on where they should be investing. These two themes are related and I thought a quick analysis might be helpful.

Look at the two charts below. The first chart is the Dow Jones average for the last two years. The second chart is the exchange rates of selected currencies relative to the U.S. Dollar for the same period. Notice that when the U.S. stock market began declining in September 2007 all four of the currencies started to strengthen against the Dollar. As foreign investors withdrew their money from the U.S. markets they not only chose other markets to invest in but also switched out of Dollars. The longer that U.S. markets are not attractive, the stronger the Euro and Yen will become.

So the answer to "where to invest"? Euro and Yen denominated securities look promising. Even if the securities do not perform, the currency gains should provide a decent return. For the more adventuresome investor, Brazil and Chile look interesting.

Investing in foreign currency denominated equity securities is not for the faint of heart and short term interest bearing notes denominated in a foreign currency may be more appropriate for certain investors. Consult your licensed investment advisor.

The FX chart came from the Sauder School of Business at the University of British Columbia and can be found here. This is the best site I have found for analysis of FX.