Currency fluctuations affect a country’s economy and, in turn, the individual investor. Here we want to examine how a strong or weak currency will permeate the economy. Always remember that currency fluctuations are relative depending on the countries involved.
The Strong Currency Scenario
A strong currency sets in motion a deflationary trend in the economy. As the currency becomes stronger, other countries trying to buy your products must pay more for them. This starts to turn away buyers. In response, the country with the strong currency must cut back production, lay off employees and reduce prices to be competitive. Interest rates are lowered to stimulate production and consumption. Exports fall.
The Weak Currency Scenario
A country with a weaker currency can produce goods cheaper. Those goods are in demand by other countries that can buy them on the cheap. The economy’s production of goods and services grows, business owners expand and hire more employees and the overall economy expands. Interest rates start to rise to curb excessive growth. Exports rise.
The Strong US Dollar
The December futures US Dollar Index closed at 84.43, the highest level in 14 months. This is a recent change in trend, yet we can see the effects on certain investments. Commodities and commodity related companies are seeing a fall in prices. In the energy sector, the November futures contract for WTI crude closed at $91.98 per barrel. This down more than $15.00 per barrel from its recent peak. December gold futures contract closed at $1,226.90 per ounce. This is sloshing around near the bottom of channel. US grain futures are getting hammered to new lows. December wheat is at $4.88/4 per bushel. December corn is at $3.38/2 per bushel and November soybeans are at $9.71/4 per bushel. Importing countries are having to pay more for our grains and are cutting back their buying. This, in turn, is forcing the US to drop prices to compete with the rest of the world.
Countries that are energy and/or raw materials producers such as South America and Australia are seeing a slowdown in their economies. Australia that was booming just a couple of years ago now is laying off thousands of mine workers and shutting down production. China, that was a big importer of raw materials has slowed its buying down and is trying to curb excesses in its economy.
The Euro Factor
Adding fuel to the US dollar is the weakness in European economies. Europe has never completely recovered from the Great Recession and is desperately trying to stimulate its economy. Interest rates have gone negative. Except for Germany, most other countries, especially the Southern Tier, are in a deflationary spiral. Added to this mix is the growing bond crisis in Europe. European countries have been buying each other’s bonds. However, not all European economies are equal and hence, not all sovereign bonds are equal. This is creating a chaotic situation in the their bond markets. When the Euro was formed, weaker countries that had few exports expanded by hiring in the public sector. With the Crash of 2008-09 these countries have had to slash employment and pensions. Their bonds rates have jumped. Now there is a question as to whether they will be able to pay off their creditors. More and more stimulus is being created to combat this trend.
The Euro had been trading around the $1.40 level for months. There is a concerted effort the devaluate the Euro. It has since fallen to the $1.29 level. One of the best trades has been to sell the EUR/USD.
Wealthy investors are fearful of what might happen and are moving their money into the US dollar. This is an added factor causing the US dollar’s rise.
The Ukraine Crisis.
The same scenario is being played out in Russia and the Ukraine. The Ruble is getting hammered in international markets, making the portfolios of wealthy investors shrink. Here again, they are fleeing their currencies and moving their money into the US dollar.
Not only must the investor follow international currency trends, but also must study the industry, products and forward guidance before making a decision.