If you own U.S. dollar-based assets such as stocks and bonds, you really need to think about diversifying your portfolio. The trend for the USD is down, and I expect it may continue to drift lower.
The USD is trading at a 25-year low against the commodity-based Canadian dollar, which has been benefiting from the price appreciation in oil, gold, and metals. Against the USD, it now requires only CDN$1.09 to buy US$1.00. Only a few years ago, over CDN$1.50 was required to buy US$1.00.
The USD is also trading at a nearly a five-month low against the Japanese Yen, and it is also weak against the Euro. The decline of the USD should not be a surprise to you, especially for those of you who have been following the commentaries in PROFIT CONFIDENTIAL, where we have been bearish on the USD.
Meanwhile, the USD is also gaining some strength against the Chinese Yuan, which, while still insignificant, may be a sign China is feeling the pressure from Washington to let the value of the Yuan rise. The massive U.S. trade deficit with China remains a sticky point for Washington, and there are threats of imposing high import duties.
The reality is the White House wants the USD to depreciate in order to make U.S.-made products and services cheaper for foreigners, and in turn, help to pump up U.S. exports and reduce the surging trade deficit it has.
The Federal Reserve may cut interest rates later this year, and this will help further ease some support for the USD. It is clear that President Bush wants a softer USD, despite not coming out and saying it. The trend for the USD is clearly negative, and, as an investor, you need to deal with this.
You should try to increase some exposure to non-USD- denominated stocks. For instance, you can buy some major U.S. stocks that are interlisted on the Toronto Stock Exchange in Canadian dollars. You can also buy U.S. index instruments such as the S&P 500 based in Canadian dollars.
Alternatively, you can buy major blue chip or large-cap Canadian stocks listed on the Toronto Stock Exchange, the major stock exchange in Canada.
Another strategy is to buy put options on the USD to hedge against further weakness. This strategy would make sense if you have a significant portfolio.