It sounds strange, but nobody wants a strong dollar.
For those currently holding strong currencies (US dollar, euro, etc.), your purchasing power has gone way up.
Buying foreign goods that are priced in weaker currencies allows for all kinds of buying opportunities.
But, there is another side to this story…
The power that US dollar holders feel right now is inversely proportionate to the weakness that many other currency holders feel.
And here is why that is all going to change:
Foreign creditors are selling US Treasuries
Source: Bloomberg
A powerful dollar makes goods outside of the US market look attractive
This is exactly what President Trump wants to avoid.
A strong dollar will only increase the trade deficit. As dollar holders continue to buy foreign goods, foreign buyers will continue to avoid US goods.
The US government will have to implement massive policy change to make this happen. This can be done through a variety of ways – tax cuts, interest rate changes, and/or monetary expansion.
A powerful dollar will be corrected by the free market
Sure, the US could implement all kinds of changes in order to combat a strong dollar – Japan has been attempting to do this with the yen for years.
But, if for some reason the US dollar continues to strengthen, the free market will eventually reverse the trend.
The simplified scenario would go like this:
- As the dollar strengthens, foreign buyers start to dry up.
- As foreign buyers start to disappear, US manufacturers lose money.
- As the US economy begins to slow down, the dollar begins to weaken.
- When the dollar weakens, trade returns.
- As trade returns, the economy gains strength.
- And the cycle continues…
For you and I, as investors, we need to understand where we are in this cycle. We also need to understand that it is nearly impossible to time this cycle exactly right. So make moves in anticipation, instead of getting caught in the fall of a currency’s strength.
I’ve recommended many ways to protect yourself from this scenario unfolding HERE. I will also have some actionable opportunities coming up soon!
