To:Frank Pembleton who started this subject
From: Frank Pembleton
Friday, Jun 21, 2002 9:02 AM
View Replies (1) | Respond to of 14652
How to play the declining U.S. dollar
Five ways to profit: Institutions using forward contracts to bet against US$
Jason Chow -- National Post
Friday, June 21, 2002
The decline of the U.S. dollar over the past three months has become an obsession for market watchers and money managers.
What a change in such a short time. Until recently, the U.S. dollar's strength seemed impenetrable. Even during last year's
economic downturn and through the Sept. 11 attacks, the dollar remained the standard in world currency markets.
But since the end of March, the U.S. dollar has turned from an investor trump card to wild card. Against the Canadian dollar,
the greenback has lost 4% while against the yen and euro it has lost 6% and 7%, respectively.
Rising gold prices, weak equity markets, political uncertainty, and a widening current account deficit have been the usual
explanations for the decline. Yesterday, the U.S. dollar slid to its lowest levels against the euro in two years after a
government report that showed the U.S. current accounts deficit had ballooned to a record-high US$35.9-billion in April as
imports outpaced exports.
These days, it seems like no one trusts the once-infallible greenback. Reports of pundits and money managers favouring
non-U.S. assets have only heightened the pessimistic mood. The falling dollar, combined with lacklustre performance in stock
markets, have caused global money managers to look elsewhere.
"Global investors are now in trouble," said Don Coxe, chief strategist at Harris Bank, a U.S. division of BMO Nesbitt Burns.
Not only are U.S. stocks falling, but their value in foreign currencies is falling at the same time. "They're losing two ways."
Institutional investors have begun to bet against the U.S. dollar. The Toronto-based CI Global fund, worth $2.29-billion, has
a weighting of about 1% in Canadian stocks, but a Canadian-dollar currency weighting of 18% through forward contracts as a
hedge against the greenback. The contract forces the fund to buy Canadian dollars at a future date against U.S. dollars at a
specified rate. In other words, the fund is betting that the loonie will appreciate against the U.S. dollar during the contract's
duration.
Individual investors are being told to bet the same way. Financial advisors have traditionally told U.S. clients to keep 10% in
foreign equities, but last week, Steven Roach, chief economist at Morgan Stanley in New York, recommended individuals
should double the amount, partly due to currency weakness.
Economic pundits and investors have started to weigh in on the U.S. dollar uncertainty, with some saying the fall is only a
short-term pullback with others forecasting a multi-year slide.
There are signs of hope for a rebound: the Philadelphia Federal Reserve index, a leading economic indicator, jumped to 22.2,
up from 9.1 in May and well above the consensus of 11.0, suggesting the economy is well on its way to recovery.
Still, with uncertainty and the potential for the U.S. dollar to decline even further, investors are starting to look to see how to
shift their portfolios to accommodate the changing environment. Here's five ways to profit from a declining U.S. dollar:
1. BUY NON-U.S. SECURITIES A falling dollar makes securities priced in euros, yen and other currencies rise.
For example, a stock trading in early March for 10 euros was worth about US$8.65 then, but now is worth 11% more at
US$9.60, even if the stock price hasn't moved.
The easiest way to play non-U.S. stocks is to stay invested in Canada. Also, non-U.S. foreign stock or bond funds could
prove useful. Investors who are absolutely certain of the greenback's slide should watch for funds that forgo currency-hedging
strategies. Such funds would offer the greatest exposure to currency fluctuations.
A riskier play would be to buy the foreign stocks individually. More than 2,200 ex-U.S. companies from more than 80
countries have their shares listed on U.S. exchanges in the form of American Depositary Receipts.
2. BUY GOLD Gold and the U.S. dollar have been engaged in a generation-old dance. When one goes up, the other goes
down. "Gold is the shadow currency," said Mr. Coxe, who's recommending clients buy gold stocks because he sees
continued weakness in the dollar.
3. BUY MULTINATIONALS A lower U.S. dollar would likely translate foreign sales into more dollars and bolster earnings.
Because of this factor, Salomon Smith Barney strategist Tobias Levkovich thinks major consumer, industrial and materials
companies will benefit, including General Motors Corp., Philip Morris Co., McDonald's Corp. and Proctor & Gamble Co.
4. BUY U.S. FIRMS THAT THRIVE IN DOMESTIC MARKET A lower U.S. dollar means U.S. goods become more
competitively priced as foreign-made goods become more expensive, encouraging U.S. consumers and businesses to buy
domestic, as well as boost exports.
Mr. Levkovich said companies in agriculture, paper, metals and chemicals sectors would be most affected by lower dollar
levels vis-à-vis foreign competition.
Still, the strategist warned investors that currency weakness alone "does not seem like a sound investment strategy," but a
weaker U.S. dollar does enhance the story for certain sectors. For example, Mr. Levkovich thinks shares in U.S. steelmakers
are on the way up because of growing volumes, rising prices, and declining U.S. capacity. The fact they are poised to reap
more profits as imported steel becomes less competitive because of the lower dollar is not a reason in itself to own the stock,
but would be "added gravy to the fundamental investment story."
5. AVOID U.S. IMPORTERS AND CANADIAN EXPORTERS TO THE U.S. Companies that import heavily could see their
costs rise. Market pundits have singled out merchandisers as one sector who could see their earnings slide as imports become
more expensive.
The inverse is also true -- exporters exposed to the U.S. market will see their earnings crimped. Potash Corp. of
Saskatchewan recently said its second-quarter earnings would be 60% lower than expected, partly because a rise in the loonie
makes U.S.-derived earnings less attractive when converted back to Canadian dollars.
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