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What to Do About the Depressed Dollar

03/18/2010 05:12 am 05:12:02 | Updated May 25, 2011

The dollar, the punching bag of global currencies, took another pounding in Asian currency markets today. It is not, as Vladimir Putin would have it, a sign of American eclipse. But don't be afraid to take a hint, either. If all your money is in investments tied to the dollar, let this be your motivation to start getting a little cosmopolitan.

From an American point of view, the mugging of the buck has been the dark side of the global recovery. One reason for the dollar's weakness is that the rebound is shaping up to be weaker in the U.S. than in other economies, especially those in Asia and those tied to commodity exports, like Canada and Australia. This morning, for example, we learned that half a million U.S. workers filed for unemployment last week. Yesterday, we clocked the seventh consecutive month of shrinking consumer debt (that means American consumers are not buying; and if we're not buying, we're not recovering). Australia, by contrast, added 40,600 new jobs and the Aussie central bank is raising interest rates out of concern that housing prices are rising too fast. (Wouldn't you love to have that problem again?!)

Just to put it in perspective, an Aussie dollar cost 60 cents back in November. Now it fetches 89 cents, a more than 30% climb against the greenback.

The strong consensus right now is that the dollar's skid will continue. But who knows? As Conrad de Aenlle argues in his MoneyWatch.com column, Against the Grain, the near universal pessimism may be reason to expect the opposite in the short run. He's right: I wouldn't place any big bets against the dollar right now. Markets are great at confounding the majority opinion.

Taking the long view, though, you can't ignore some well-entrenched reasons for concern about the dollar's position:

  • The U.S. share of world economy will shrink. That's not my opinion; it's simple arithmetic. But it presages less demand for dollars relative to other currencies.
  • The world will be flooded with dollars as the Fed and Congress continue to try to stimulate the economy. Too many dollars and too little demand equal a lower price.
  • To right the global trade imbalance, the U.S. will eventually have to import less and the rest of the world will have to import more. If that's the goal, a weaker dollar is going to look awfully convenient to policy makers.
The best hedge against a weak dollar is to move some of your money into international investments-in installments over the next six months at least, so that you're not piling in at the bottom. The standard advice is to have at least 20% of your stock portfolio in international mutual funds, simply as a matter of prudent diversification. (My colleague Larry Swedroe blogs the case for international diversification and MoneyWatch.com contributor Jeff Nash names some low-cost, consistent international stock funds.) Falling short of the modest 20% benchmark amounts to a bet, conscious or otherwise, that the dollar and the U.S. stock market have the best prospects in the international markets. Not to make too much of the recent past, but is that a call you really mean to make?

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