by Alexander Green, Investment U’s Chief Investment Strategist
Thursday, November 18, 2010: Issue #1391
Eleven months ago, I began forecasting that the U.S. dollar would rise sharply against the euro.
Like most contrarian plays, it was widely mocked at the time. But it turned out to be a pretty good call until the middle of the year. That’s when the dollar started wilting again.
Today, however, the greenback is oversold once more and due for a bounce back. Here’s a quick rundown of what’s happening, why it’s happening – and what you should do about it…
Europe’s Turbulent 2010
I made my bullish case for the dollar near the end of 2009 for two primary reasons…
As the financial crisis in Greece grabbed headlines earlier this year and began to weigh on the euro, the dollar rallied sharply against it in the first half.
But a bailout from fellow European nations and the International Monetary Fund shored things up – at least temporarily – and caused currency traders to begin focusing again on the large and growing U.S. budget and trade deficits.
That – plus the Fed’s announcement of “QE2″ (its latest round of quantitative easing) – has put the greenback on the defensive once more.
The Fed Keeps Pumping, While the European Dominoes Keep Falling
But two recent events indicate the dollar is set to resume its rise…
“It’s been simmering for a while,” Scott Brown, chief economist of Raymond James & Associates, said this week of the European debt problems. “Now it’s coming to a complete boil.”
What to do?
Is Your Portfolio Ready for the Euro’s Next Tumble?
Don’t sell your foreign-currency denominated stocks, as share price appreciation can easily outstrip the negative effects of a weak currency.
But for investors keeping score in greenbacks, this is not a good time to have large holdings in euro-denominated bonds or bank accounts. These investments are likely to post negative total returns if the euro sinks to fresh lows against the dollar… as I believe it will in the months ahead.
The rap against the euro when it made its debut in December 1995 was that the member states had such disparate economies that they would find it impossible to march to the same fiscal and monetary policies.
For a while, it looked like the eurozone might pull it off. But today, the luster is gone. The euro could easily fall 15% or more against the dollar over the next six to 12 months.
Govern your portfolio accordingly.