As most people who follow the market might have observed, the last few weeks have been full of volatility, but with a decided, and disturbing downward trend. What many may not have realized, unless they pay attention to the currency market, is that the American Dollar has been going up across the board. The Euro is in a dismal state and has a lot to deal with considering the economic situations in Greece, Spain, and Portugal. Combine that with the recent disaster in Japan and the subsequent slowing of their export machine, and you have an overall increase in want of American goods. But the market has been falling, one might say, how can an increased strength of the American Dollar be a bad thing? The answer, simply, is that it's not... although it is for a lot of American stocks.
You might remember my post from a few weeks ago, about how the rising cost of Gas increases the cost of commodities across the board? Well, there is a similar response to an increase in the value of the dollar. True, there is a higher demand for American goods and services, but that also means that American goods and services can demand higher price tags – the world will, of course, still pay them – (they don't really have much of a choice) but only for now. The increased power of the dollar is a boon for American businesses and goods, but it is a White Elephant for the stock market. With a increased strength in the American Dollar, American stocks are more expensive to foreign investors – which, like it or not, make up a good percentage of the money in the market today. I talked about the exact opposite effect in a post a few months back when the dollar was bottoming out, and the Dow shot up past 11K for the first time in years. Better deals may be had by investing in cheaper, more emerging markets like Brazil or India. You also have a lot of American investors who took their profits a few weeks ago, like I predicted, and are continuing to sell at inflated prices, based on the strength of the dollar. Things will, of course, level out, as the unseen hand of the market has a tendency to force in cases like this, and I think that this current “correction” has leveled off. We may see some volatility in the market based on foreign actions, but I think there will be another upward trend coming soon, expensive dollar or no.
To the Average investor, this is no more than a few fluctuations on their prospectus, despite the red arrows all over CNBC, and to the Average American, it means a stronger overall economy, and a bit more internal growth. I'd trade a couple points on my portfolio (remembering that I'm a long term investor, mind you, and I have every intention of making it back) in exchange for a more stable domestic market. The United States is still the economic powerhouse of the world, and I make no apologies, nor feel any regret, over the strength of our currency.
