The Next Bubble- Euro?

[Gearhead Jim]

The title is just a quick way of saying that the current Dollar vs Euro exchange rate seems somewhat overdone. Sure, the U.S. has lots of problems to drive down the dollar, but most of Europe has similar issues; it's just not fashionable to talk about them right now.

I'm soliciting comments on
1. What investments will do well when the dollar starts to recover,
and
2. When and why do you think that the recovery will begin, if it ever does.

My foreign equity fund has done very well in recent years, probably i will want to reduce my exposure there [-]when[/-] if things start to turn around.

 

[tulak]

I personally think the Euro is too high and will eventually come down with a strengthening Dollar. But who knows when?

You mentioned that your allocation in your foreign equity is high - doesn't that mean you'd want to rebalance?

That's pretty much my strategy: once something has gain more than the others, then it's time to rebalance and get back my original aa.

 

[haha]

Lasting Euro Bubble Doubtful

THE EU will strongly resist the euro getting very much higher,as many European States are exporters and a high Euro is very difficult for business and labor.

On a value basis, it is quite high right now, as the original post suggested.

Ha

 

[FIREd]

Well that's a refreshing thread! I was getting tired of reading about the imminent collapse of the US dollar on other forums and how it is time to retreat to the mountains with plenty of guns and ammo because the country is going down like a sack of you know what...

I completely agree that the Euro is too high right now. I often get my news from Europe and it is clear that European exporters and goverments are trying to twist the arm of the ECB to better control the Euro/dollar exchange rate via interest rate manipulation. So far the ECB has resisted but with the euro at $1.40, the pressure is mounting. Plus as someone else mentioned, Europe has its own long term debt problems (social program costs will escalate as the population gets older and increasing taxes to pay for these costs is not an option since the taxes are already so high). Couple that with economies that generally grow at a slower rate than in the US (which translates into lower tax revenue growth), and I think that there is no doubt that over the long term the Euro will come down.

Right now my asset allocation is about 66% US and 33% foreign and I intend to keep in that way no matter what happens to exchange rates.

 

[tulak]

Well that's a refreshing thread! I was getting tired of reading about the imminent collapse of the US dollar on other forums and how it is time to retreat to the mountains with plenty of guns and ammo because the country is going down like a sack of you know what...

Seems to me that's an indication that the dollar is undervalued.

Go against the trends: if you wanted to play - which is maybe what the original poster was suggesting - then you try shorting something like FXE.

Of course, I'd never do this within my aa nor is this a recommendation on my part; I never liked shorting, too pessimistic for me...

 

[brewer12345]

The EUR and GBP will slump vs the USD when the central banks of those economies start cutting rates. They chose not to do so last week, but iof the Fed keeps cutting they will not have much choice in the next year or so. Having said that, I wouldn't get too excited about changing international equity allocations if you are like most Merkins and are quite underweighted to international equities.

I think that the Asian currencies (especially the JPY, Korean Won, and Chinese Yuan) are likelyto rise vs. teh USD in teh next couple years regardless of what the US, Euro and UK central banks do.

 

[Lsbcal]

It "feels" like the Euro is overvalued and the Economist put the Euro at 15% overvalued based on Purchasing Power Parity (and that was when the rate was 1.35 or so). But how does a mere mortal get ahead of the currency markets? And if the Euro were to decline vs the dollar would this be better for US stocks vs European or worse?

Seems that there are too many questions to have a good chance of getting this (and the timing) right. Also if you hold an international fund then most likely you have a split between Euro zone economies and Asian. I keep concluding that the best thing to do is stick with my "long term" allocation to internationals. If the dollar should go way below levels of the last 40 years (see Fed charts on this) then maybe I'd have to lighten up on international funds.

My 2-cents.

Les

 

[brewer12345]

Ah, but what does the Big Mac index say?

 

[GladToBeFree]

I'm soliciting comments on
1. What investments will do well when the dollar starts to recover,
and

Generally the US stock market will be a good investment when the dollar starts recovering. Of course, nothing is guaranteed. Like others, I'd probably stick to my aa and perhaps start moving my foreign investments into emerging markets when it looks like a stronger dollar ahead. I would think they would be affected less than Europe.

Jim.

 

[tulak]

Generally the US stock market will be a good investment when the dollar starts recovering. Of course, nothing is guaranteed.
Jim.

I'd agree, but what worries me about this logic is that the US stock market has been a good investment while the dollar has been falling. Eventually it has to be a bad investment...

 

[FIREd]

I'd agree, but what worries me about this logic is that the US stock market has been a good investment while the dollar has been falling. Eventually it has to be a bad investment...

Well I somewhat disagree with that. If you look at the US stock market on its own, it looks like it has done very well over the past few years. But compared to the stock markets in Europe, Brazil, Russia, China, India and many other countries, the US stock market has been an underperformer for years now (and if you own international equity funds, you know how well they've performed in the past few years!). So maybe the US stock market wasn't such a good investment afterall! The last time the US market performed better than international stocks was in the late 90's (before the dollar started losing its strength).

 

[tulak]

Good point. I was trying to make it black and white, when it's really shades of gray.

 

[Delawaredave5]

Here's Big Mac index from Feb

The Big Mac index | Economist.com

Suggests European currencies overvalued v. $, especially Nordic countries. Asia undervalued against $.

One argument is that the dollar might be at end of its "cyclical range" against these currencies - and will get stronger.

But the other argument is that the growth of BRIC nations and our tough defecits could mean a long term structural decline in the dollar. Bernsteins one book talks about the "rise and fall of nations" (France, UK, now US, next BRIC) - and as a "regime" ends, so goes their currency tanks.

Wasn't the British pound trading at $4 back in the 40's ? Anybody have any good links of "ultra long term" (100+ year) currency movements ?

I'm in the "spread your bets all around and sleep well" camp.

 

[Grizz]

2. When and why do you think that the recovery will begin, if it ever does

It will begin when one of two things happen, either the U.S. $ drops to a level where the country does a 180 degree turn and becomes a net exporter, at which point the economy will support itself without essentially borrowing from all of the other countries at an alarming rate, or the much more painful tough love method whereby the fed raises rates to slow inflation.

 

[ziggy29]

I would agree that the Euro is overvalued. Many of the same reasons the US dollar is depressed are also impacting the Euro -- at least they should be. In aggregate the debt as a percentage of GDP for the Euro nations isn't that much lower than it is in the United States.

I think at least in the short term the U.S. dollar is way oversold, but if fiscal policies (about interest rates, the debt, the trade/budget deficit, et cetera) don't change, any short-term recovery would be a dead cat bounce.

 

[Hamlet]

This is the key to why I think the dollar will be weak for quite some time. Americans are going to have to start producing more than they consume. That is going to require a dramatic sea change in our culture.

The trade deficit numbers don't show much improvement yet. Until they do, I would expect the dollar to continue falling.

It will begin when one of two things happen, either the U.S. $ drops to a level where the country does a 180 degree turn and becomes a net exporter, at which point the economy will support itself without essentially borrowing from all of the other countries at an alarming rate, or the much more painful tough love method whereby the fed raises rates to slow inflation.