Sunday, January 3, 2010

A Comparison of Major Currencies in the Last Decade

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

One of the most consistent messages from U.S. Treasury Secretaries in the last decade was that America has a strong dollar policy. During that period the trade-weighted dollar (the U.S. dollar measured against a basket of six currencies proportional to U.S. trading activity with the respective countries) fell approximately 21%. The value of the dollar went down against the Euro, the Yen, the Swiss Franc, the Canadian dollar and the Australian dollar. It traded flat against the British Pound. One wonders what would have happened if America had had a weak dollar policy.

The U.S. trade-weighted dollar opened in 2000 around 99. It then rallied in the beginning of the decade (this was a continuation of a rise that began in 1995) and peaked with a double top just above 120 in 2001 and 2002. It was mostly downhill from there until it hit bottom in the 71.50 area in 2008. A flight to safety during the Credit Crisis rallied the dollar back to 90. It closed out the decade at 78.22. The decline of the dollar in the first ten years of the 2000s was merely a continuation of a much longer drop that began in 1985, the year that the trade-weighted dollar peaked at over 160. In the twenty-five years since then, it has lost more than half of its value.

As the dollar fell, other major currencies rose. The Swiss franc was the big winner during the decade with a 49% rally. The euro was up 37%. The Japanese yen had a more modest rise and the value of the British pound remained essentially unchanged against the dollar. The commodity-based currencies, the Australian and Canadian dollars, were up 39% and 41% respectively during the decade. In general, other major currencies bottomed against the dollar in the early 2000s. The euro was the first in 2000, it was followed by the Australian dollar in 2001, then the Canadian dollar and the Swiss franc, which made a double bottom in 2001 and 2002. The Japanese yen also hit its low value for the decade in 2002. The one exception was the British pound, which bottomed during the Credit Crisis in 2009. All the majors had significant sell offs against the dollar late in the decade because of the problems in the global financial system and if they hadn't, their rallies would have been much greater than the final numbers indicate.

For the last twenty-five years, not just the last decade, the dollar has been losing ground against the other major fiat currencies (all backed only by the credit of their issuing governments). The market has made its opinion quite clear about U.S. budget deficits, trade deficits, and monetary policy compared to those of other nations. If the U.S. dollar wasn't the reserve currency for the world, the dollar would have devalued much more than it did. Unless the U.S. puts its fiscal house in order - and just the opposite is occurring - expect dollar devaluation to not only continue, but to accelerate in the next decade.

Investors who want to invest in currencies can purchase FXA, FXC, FXE, FXF, and FXY,  ETFs which hold the Australian dollar, the Canadian dollar, the euro, the Swiss franc and the Yen respectively. UDN can be used to take a short position in the trade-weighted dollar.

Disclosure: No currency positions.


Daryl Montgomery
Organizer,New York Investing meetup

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

No comments: