When times are bad close to home, it's easy to believe that you've got it worse than anyone else. But sometimes, when the whole world is feeling the pinch, your pretty-bad situation makes you a lot better off than somebody else's much-worse plight.
That's exactly what's been happening with the U.S. dollar in recent months, as it has risen sharply after a year-long downturn. It's hard to argue that things in the U.S. are all that great. Compared with what's going on elsewhere in the world, though, investors may be realizing that things here aren't necessarily worse than what other countries are seeing.
Does this look familiar?
After all, consider some recent economic problems we've heard in the news:
- Uncontrolled national debt and budget deficits.
- Intimidating levels of pension obligations and other future benefits payments.
- Problems with real estate and other loans, along with possible corruption in the financial industry.
- Political uncertainty regarding whether a bailout will solve current problems or reinforce bad habits.
Until recently, if you read a story talking about those things, you knew with near certainty that you were talking about the U.S. economy. Now, though, it describes almost to a T what we're seeing in Greece and other struggling countries within the eurozone.
The idea that the world is in this mess together isn't exactly new. It's been true throughout the crisis. In early 2009, it wasn't just U.S. banks like US Bancorp (NYSE: USB ) and Wells Fargo (NYSE: WFC ) that saw their continuing existence put in jeopardy; foreign institutions like Allied Irish Banks (NYSE: AIB ) and Swiss giant UBS (NYSE: UBS ) took just as much if not more damage from the credit crunch.
Moreover, it wasn't just the U.S. government that took steps to stimulate its national economy. Governments around the world took up the stimulus charge. For countries in good fiscal condition, such as China, temporary increases in government spending didn't require too much effort. Inevitably, though, debt-laden countries around the developed world found the additional spending hard to handle -- and we're seeing the impact now in the Greek crisis.
What about the dollar?
Since late 2008, the dollar's reactions to news about the crisis haven't always seemed consistent. During the two worst phases of the market meltdown, the dollar skyrocketed in its typical role as a safe haven. Yet during much of the stock market's ensuing rally, the dollar fell like a stone -- which didn't entirely make sense, given the fact that other developed countries weren't immune from the problems of unemployment and a sluggish economy that the U.S. faced.
Recently, though, the dollar has started to rise, despite ongoing concerns about the weak recovery. Why? Because Greece has reminded investors that other currencies around the world, including the euro, will have to face the same fiscal pressure that the U.S. dollar has seen until recently. That doesn't necessarily mean that the dollar is strong -- it's just no worse an option than the euro, and so on a relative basis, the euro has more room to weaken.
Winners and losers
If you're bullish on the dollar's prospects, then you have some choices to make. One direct way to bet on currencies is through ETFs. The PowerShares DB US Dollar Index Bullish ETF (NYSE: UUP ) is tied to the dollar index, which tracks the dollar's value against several major currencies, primarily the euro. Shares of the ETF become more valuable when the dollar rises.
You can also make more indirect investments based on the dollar's prospects. For instance, U.S.-based multinationals like Coca-Cola (NYSE: KO ) and Procter & Gamble (NYSE: PG ) prefer a weak dollar because it makes the value of their foreign revenues higher in U.S. dollar terms. Conversely, a strong dollar forces them to face headwinds that their foreign competitors don't have to deal with.
Perhaps the best opportunity that lies ahead for dollar bulls is in buying international stocks. A stronger dollar makes buying foreign stocks cheaper. Given that many investors don't have enough foreign stocks in their portfolios right now, an episode of dollar strength could be just what investors need to get in at the best possible time.
It's all relative
Yes, strength in the U.S. dollar may seem surprising right now. You shouldn't get lulled into believing that all of the U.S.'s problems are behind it, though. Rather, other countries are realizing that they're going to have to find solutions to the same problems as well -- and for now, that is what's pushing the dollar higher.