Some of the biggest names in investing publicly stated months ago that the U.S. dollar would fall hard against other world currencies. Big investors, like Warren Buffett, have actually made investment bets the dollar would fall. Why hasn’t it happened?
Patience, my dear reader, patience. The financial markets rarely do what they are expected to do. And, in a case like this, when so many have proclaimed their belief in the eventual demise of the U.S. dollar… and if even if they are right… the market will take its sweet time to deliver the goods.
It’s all about interest rates. Yes, China is sitting with $1 trillion U.S. dollars. And yes, Greenspan took away the public availability of M3 (the broad money supply). But foreigners and most investors didn’t expect the Federal Funds Rate would go up 425% in two years!
So, if you are China, and you have a $1 trillion U.S., you are enjoying the highest interest rates available in the free world. Interest rates in the U.S. are now the highest of the G7 industrialized countries. And, until interest rates start coming down in the U.S., the U.S. dollar will not start its decent in value against other currencies.
That begs the big question: When will rates fall in the U.S.? Interest rates in the U.S., which I believe will be lowered, will not fall until there are clear signs the U.S. economy is in trouble. The Fed watches the economy, but it is also very aware of foreign investor demand for U.S. Treasuries. Right now, foreigners like U.S. bonds because the U.S. dollar has been stable and interest on the bonds are relatively high compared to other forms of “secure” investment. The current interest rate position is a great one: Rates are not too high to stifle the economy and they’re not too low so foreigners buy the bonds we so desperately need to sell in order to finance our deficit and debt.
My bet is the Fed will take care of its home business first like it always has. By that, I mean should the economy show clear signs of slowing, the Fed will move to lower rates. Sure it will make new U.S. Treasuries a harder sell, but it will also make the older U.S. bonds more valuable.
But, please remember, history has proven the Fed is usually slow to act. Warren Buffett’s prediction will come true… it will just take time. As an investor, you need to look at your portfolio and ask, “If the U.S. dollar falls drastically against other world currencies, will I be protected?” And just as important, if you are American, do you have enough foreign investment (such as foreign stocks) to benefit from the demise of the U.S. Dollar?