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How Can the Dollar Be Rising?

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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.

Going overseas can be just what your money needs. Let Rex Moore give you the most compelling case yet for these stocks.

Fool contributor Dan Caplinger can hardly wait for his New Zealand trip later this month. He doesn't own shares of the companies mentioned in this article. Coca-Cola is a Motley Fool Inside Value recommendation. Coca-Cola and Procter & Gamble are Motley Fool Income Investor picks. The Fool owns shares of Procter & Gamble. Try any of our Foolish newsletters today, free for 30 days. The Fool's disclosure policy's mama said there'd be days like this.

Read/Post Comments (4) | Recommend This Article (7)

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  • Report this Comment On March 01, 2010, at 12:18 PM, kurtdabear wrote:

    Believe it or not, $$ are about to become rather scarce because the economy is wiping them out faster than the Fed is printing them, and the US $ is needed in world settlements since it is the world's reserve currency.

    With most U.S. homes down around $200,000 each in value over the past few years, that means every million homes has lost $200 billion in theoretical value. Big deals--like last month's huge apartment default in NYC--wipe out billions at a stroke. Fannie Mae, Freddie Mac and AIG have all reported new multi-billion $ losses. Dollars are disappearing!

    This money was all theoretical--held in bonds and electronic impulses and the minds of the holders. It ceases to exist when the borrowers lose the ability to repay. Too many people fail to understand that a bond is just an IOU printed on fancy paper. A million $ bond represents debt, not an asset. Your million was spent and dissipated throughout the economy, so that money is gone, and only the borrower's million-$ debt to you remains. You've got nothing, and he's a million in the hole!

    This ripples out through the economy like a domino race. For instance, Calif.'s two employee pension funds were among entities that lost hundreds of millions of $$ in the NYC apartment default. Calif. was already going broke, and their huge pension obligations were a big part of their deficit. So now it becomes more likely that Calif. will default on bonds and payments, and more money will evaporate.

    So there will be quite a demand for $$ for at least a couple of years into the future because people do need them for commercial settlements, and they are evaporating faster than the Fed can print them.

    In the end though, no central-bank-created paper currency is rising; some are just falling more slowly than others in their race toward worthlessness. But for at least a year or two, the $ could be king again.

  • Report this Comment On March 01, 2010, at 2:49 PM, TheDumbMoney wrote:

    I disagree with kurtdabear about money becoming worthless. But implicit in the above post is the worthy idea that it is silly that people have to be told why the dollar is rising, or at least not falling. In addition to other currencies/countries being even less safe, the M2 and M3 (if you care to measure it) money supplies are simply not that large, relatively. I continue to believe our biggest fear right now should still be deflation. (I tie this analysis to the value of the dollar because, at least according to my understanding of macrecon, all other things being equal, if one country suffers severe inflation, the value of its currency drops.) What people who are freakadoodling about hyperinflation don't realize is that dollars are not like gold -- thus, while the fed can 'create' them, it can also destroy Volker did in the early 80s to stifle inflation. Thus there is no absolute supply of fiat dollars out there that are going to bite us in the bum. While Glenn Beck apparently does not know this, the treasury bond market does. Frankly, a strong dollar is not an entirely good thing. A strong yen sure hasn't seemed to help Japan. A weaker dollar would help juice foreign investment in the U.S., and would help our exporters.

  • Report this Comment On March 01, 2010, at 9:44 PM, jesse2159 wrote:

    One good thing about a stronger dollar is that it will be cheaper to visit Europe this summer.

  • Report this Comment On March 02, 2010, at 2:42 AM, xetn wrote:

    Just to clarify definitions: Monetary inflation (usually just inflation): additions to the money supply. Price inflation: the normal result of monetary inflation (a loss in the purchasing power of the currency).

    Monetary deflation(removing currency from the economy) usually done by the Fed purchasing treasuries. Price deflation: the result of decreased money supply or the withholding of purchases.

    You can have price inflation of only certain goods/service because the demand outstrips supply. Inflation does not happen to everyone at the same time. First receivers of new money are able to purchase goods and services before prices begin to rise. Last receivers (such as pensions) are never able to take advantage of lower prices and will pay the inflated prices.

    Deflation is the reverse of inflation. While there have been some reduction it the prices of certain items, it does not apply to all items. As a matter of fact, according to the lasted CPI report consumer prices rose nealy 3 percent in 2009 and, unofficially nearly 6 percent using un-massaged data (the way the cpi was originally calculated).

    According to economic theory, almost any amount of currency will suffice because the value of money, like any other good or service fluctuates depending on the demand for currency. The higher the demand (people hoarding) the lower prices become. The lower the demand, the higher prices become. This is supply and demand and is distorted by the operations of the Fed.

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