The dollar nightmare
The drooping greenback is starting to get investors jittery.
May 2, 2003: 12:21 PM EDT
By Justin Lahart, CNN/Money Senior Writer
NEW YORK (CNN/Money) - In just a week, the Treasury Department is going to unveil a new $20 bill that's going to use, ahem, a "subtle background color". What the color is going to be is a state secret, but the way things are going for the U.S. dollar lately, the appropriate hue for the Jackson is going to be red.
The red... we mean greenback keeps dropping and in some investing circles this is causing increasing alarm. Thursday, the buck fell to new four-year lows against the euro (really the "synthetic euro", because the currency hadn't even been introduced yet four years ago). Meanwhile, the Dollar Index, which shows how the dollar is faring against a basket of major currencies, has fallen 9.2 percent this year.
So why is this a problem for the market? Put yourself in the shoes of a European portfolio manager (ooh, nice tassels), hanging out in some cafe drinking an espresso and looking over your portfolio. Let's say you're an investing genius, and you bought U.S. stocks on Oct. 9, when they closed at their lowest level in over five years. Since then, the S&P 500 has risen 18 percent.
But in the same period, the dollar has slipped a bit over 13 percent against the euro. Add it all up and in local currency terms you've made just about 2.5 percent on your U.S. stock investment. Ugh.
Of course most global portfolio managers aren't geniuses. They are, by definition, just average. The U.S. market has not been nearly as kind to them lately as you'd think if you just glanced at the major indexes and, given a widely held belief that the dollar has further to fall, many may be considering pulling money out of the U.S. assets. Or maybe they are pulling money out of the United States, and that's why the dollar is drooping.
All of which leads us to the nightmare scenario. It comes up every few years, and it goes like this: All those global portfolio managers, worried about the hits they're taking from the dollar, are going to start selling U.S. assets which is going to: A) send U.S. stocks lower and B) further damage the dollar. Which is only going to make the global investors (and U.S. ones) more twitchy, and beget more selling. Which will beget more selling. Pretty soon you have a massive rush to exit U.S. assets, and a global financial catastrophe.
Pretty scary, right? If it's any consolation, there have always been people who worry investors are going to rush out of the United States. They point out that the United States' has a huge current account deficit, meaning that, on net, foreigners own far more U.S. assets than U.S. investors own foreign assets. Eventually, the argument goes, the foreigners are going to want to repatriate their money -- and if the dollar is falling badly, they may want to repatriate it in a hurry.
Like other disaster scenarios that people get worked up about -- Y2K, Skylab -- the big, bad dollar drop has never happened. The problem, however, is that when these dollar worries surface, stocks often see a period of weakness.
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