How To Profit from the Weakening Dollar

Jeff D. Opdyke

And so we begin the next chapter in the history of the U.S. dollar.

From the early pages we’ve seen so far, this is not likely to be a chapter that’s kind to the greenback.

After initially spiking sharply higher in the immediate wake of Covid’s emergence in America, the buck has since fallen nearly 11% in about six months. Now, the two primary questions we care about are: Will the dollar go lower? And how low can it go?

The answer to Question 1 seems like an obvious “yes.”

Congress and the Fed have been disgorging new dollars as if the Treasury were a Pez dispenser. That shows no signs of abating, given the sorry state of the U.S. economy (record levels on Wall Street say precisely zero about the underlying economy, where joblessness is rife and businesses are failing in large numbers).

Moreover, with Fed Chairman Powell’s recent commentary, we now face the likelihood of inflation without a commensurate rise in interest rates. That will undermine the dollar even more. The goal of such a strategy is to inflate away as much of America’s debt as possible as we close in on a deeply unhealthy debt-to-GDP level of 155%.

Ultimately, this effort to “inflate away the debt” is probably good news for the dollar in the very long term (assuming some sense of rationality returns to an addled and irrational government addicted to deficit spending). But in the near- to medium-term, we’re looking at ongoing greenback angst. That, in turn, will hurt the consumer even more, since so much of what we buy is imported and those prices will necessarily rise in dollar terms as the buck weakens. And that just means the economy isn’t likely to reach escape velocity when the consumer – the primary driver of the U.S. economy – is struggling.

For that reason, anti-dollar investments are necessary in a portfolio these days.

High-quality, foreign, dividend-paying blue chips are one options, and I’ll be back soon with a column on opportunities there.

But for now, the safest option is owning exposure to currencies that move opposite of the dollar.

First on the list is the Swiss franc, one of the two best-managed currencies on the planet (the other is the Norwegian krone, but in a world where the risk of economic decline is so high, oil prices face potentially debilitating headwinds, and the krone is a very oily currency).

The franc in this chart – CurrencyShares Swiss Franc ETF (FXF) – is the orange line. You can clearly see that the Swissie pretty much moves in direct opposition to the dollar, so it’s the currency you want to own as the dollar’s slide continues. As some point, the Swiss central bank will intervene if the franc strengthens too much, and that will limit upside. But you’ll still benefit from being out of the buck.

And then there’s the Japanese yen…

Again, pretty clear here that the yen – represented by CurrencyShares Japanese Yen ETF (FXY) – moves opposite of the dollar. Now, the yen is not one of the world’s best currencies by any stretch, and Japan’s zombie economy likely foreshadows America’s destination. Nevertheless, that zombie economy has spawned a unique trait that makes the yen an anti-dollar play: Mrs. Watanabe.

Because interest rates have effectively not existed in Japan since the late-1990s, Japanese housewives – the generic Mrs. Watanabe – have become proficient players in the “carry trade,” selling low-yielding yen to hold higher-yielding currencies. The minute that trade falls apart, however, they rush to repatriate their yen, driving up the value of the Japanese currency with their buying demand. In a low-rate dollar world, the otherwise weak yen will remain strong relative to the greenback.

As for Question 2: How low can the dollar go?

Strap in. We’re about to find out…