It pays to be the only major power in a world war to avoid fighting on native soil. The United States emerged from World War II in just such a position as the only economy standing. In an agreement hammered out in Bretton Woods, New Hampshire in 1944, forty-four world nations agreed to hitch their financial wagon to the United States dollar. Future monetary policy would depend on exchange rates tied to the value of the American greenback.
The Bretton Woods agreement would collapse in 1973 but those three decades cemented the dollar as the international monetary standard, a position that carries enormous rewards in the world economy. The United States can formulate its monetary policy independent of the vagaries of any other economy. Other countries by contrast must wait until the big dog has finished his dinner before eating. Only after the United States acts can nations with healthy economies establish its exchange rates.
There is money to be made for investors on those exchange rates – if you know your geography. When the dollar is strong goods tend to flow into the United States from provider countries as the good times roll. But what happens when the United States experiences a falling dollar? A savvy investor can still use knowledge of world geography to make money.
A Guest Post by FXTM
In times of a weak dollar American-made goods (and contrary to what is popularly reported, two-thirds of all the planet’s “stuff” is still manufactured in the United States) become cheaper to foreign buyers and exports go up. American companies with a broad base of foreign trade partners will flourish in times of a weak dollar. If you forecast a weakening dollar, that is the time to purchase equity positions in those companies. If large chunks of their foreign revenues are derived from countries whose currency is linked to the teetering dollar, all the better.
The fortunes of the strongest of America’s trade partners can yield short-term trade opportunities. If investors can identify the countries whose currencies will perform best against the flailing dollar those currencies can be purchased directly or obtained in exchange-traded funds.
Another investment strategy is to increase your buying of targeted foreign companies when the dollar is falling. You can do this with individual stocks or international mutual funds. Look for countries in your research that appear to be candidates for growing strength against the dollar and put money into their stock market indexes.
Investors with a long-range philosophy can consider sovereign wealth funds. Countries create these investment instruments from their financial reserves cobbled together from trade surpluses and profits from natural resources. Worldwide more than $2.5 trillion is set aside in these “rainy day” funds to bolster a nation’s economy. The funds are then used by governments to trade currencies.
Investors betting against the power of the dollar must remain nimble. After all, the fortunes of the world’s strongest currency can always rebound.
Further reading: 5 Most Predictable Currency Pairs – Q3 2014
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