Touchdown for U.S. Dollar…What it Means for Stocks

by Michael Lombardi, CFP, MBA

A bad day yesterday for the U.S. dollar, as it hit a one-year low against the euro. Here’s why the decline of our dollar is important and why our greenback’s decline will eventually be negative for the stock market:

  • It’s not that the European countries are doing better than us. On the contrary, my recent trip to Europe only confirmed (in my eyes) that they have suffered a recession far worse than ours. The euro is not going up, because Europe is economically advancing and North America is not. Simply, most world currencies are rising against the U.S. dollar, because investors are slowly exiting the dollar.
  • With the highest annual deficit on record this year (did you say $1.5 trillion?) and total debt estimated to almost double over the next decade, there is obvious concern about what is behind the dollar. Hence, our answer to why gold bullion prices are rising. Let me put it this way. If you were China and you sold billions of dollars of goods to the U.S., at what point would you stop taking the U.S. dollar as payment for your goods (because you are concerned about the falling value of dollars you would have to bank) and start demanding either a rising dollar or another currency?
  • When the Federal Open Market Committee issues its regular post-meeting comments today at 2:15 p.m. EST, the worst-kept secret is that the Fed will say that it is keeping interest rates at record lows for an extended period. This news has already been reflected in the declining value of the U.S. dollar.
  • As some point, interest rates in the U.S. will need to rise to stem the decline in the U.S. dollar and to tighten a monetary policy, which is extremely inflationary. The stock market has never been a fan of rising interest rates. Sure, there is a possibility that rates may rise by a minuscule amount later this year, but more than likely interest rates will start to rise in 2010 and that will be very negative for stocks when it happens.

Michael’s Personal Notes:

Another one joins the party! First we had Germany and France posting positive GDP numbers in their latest fiscal quarters — technically ending their recessions. Now, we can add a third member to the elite group of industrialized countries that are exiting the global slump. Yesterday, New Zealand unexpectedly reported that its economy had grown in its last fiscal quarter for the first time in six quarters. On the news, the New Zealand dollar shot up, as the consensus is that interest rates will now rise in New Zealand. When will the U.S. technically exit its recession? Analysts are predicting that the U.S. economy grew between two percent and three percent in the quarter to end this month, which would technically end the U.S. recession.

Where the Market Stands:

Getting closer every day! The Dow Jones Industrial opens this morning only 170 points shy of breaking through the very important psychological 10,000 level. For 2009, the world’s mostly widely followed stock market index is now up 12% (a heck of a lot better than the paltry returns that CDs, T-Bills and GICs have paid out this year). On Tuesday, the Dow Jones closed at a new record high for the year. Most of what I read today is that the stock market is overbought and ready for a correction. I’m reading so much of this opinion that I believe the breakout through Dow Jones 10,000 will be a cakewalk.

What He Said:

“I see a deal when it’s a deal. And right now there’s a good “for sale” sign flashing on gold bullion and gold producer shares. In fact, after peaking at the $690.00-an-ounce level earlier this year, gold could be a bargain at its current price of around $650.00 per ounce. As a reader, you are undoubtedly aware of my negative stance on the general stock market and the U.S. economy. As the economic problems continue to brew in the U.S., as these problems develop into others, and as they are finally exposed, what other investment but gold will worldwide investors turn to?” Michael Lombardi in PROFIT CONFIDENTIAL, March 14, 2007. Gold bullion was trading at under $300.00 an ounce when Michael first started recommending gold-related investments. Many gold stocks recommended in Michael’s advisories gained in excess of 100%.