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International Investments



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International Investments - If the Dollar Falls

By Gary Scott

A reader recently sent this note about the falling US dollar.

“Dear Gary, PIMCO, the largest bond fund, believes the magnitude of the U.S. currency's downtrend is "as great as 20-25 percent, and perhaps greater than that" and is starting to adjust its portfolios accordingly. Warm regards, Craig”

I took a look at the article and it says: “NEW YORK (Reuters) - PIMCO, the world's leading bond management fund, said it has raised currency exposure in its bond portfolio amid expectations that the dollar is about to embark on a large-scale downtrend. In a report released Thursday, William Powers, managing director of PIMCO's portfolio management and investment strategy groups, said the bond management firm has increased its currency exposure to 5 percent from 3 percent.

”The fund was constrained to limit its currency exposure to 3 percent in the past because of volatility in the currency market. Today with the likelihood that the dollar is about to embark on its next downward leg, PIMCO's Investment Committee has increased the tolerance for currency exposures," said Powers.

PIMCO will also maintain a diversified portfolio to include the yen, euro, and emerging market currencies. Overall, Powers has a bearish outlook on the dollar, saying the magnitude of the U.S. currency's downtrend is ‘as great as 20-25 percent’, and perhaps greater than that." Read the entire article

This is the second credible source (an OECD report suggests that the dollar could fall even 50%) that believes a catastrophic loss of the dollar’s parity could occur. Recent messages have been looking at other currencies so we can know where to go. But we have not answered the question, what does the dollar’s loss really mean?

First, it means that goods from overseas will cost more. I recall clearly my college days (about 1965) when my friend Randy got married and sold his sporty Jag XK-150 to buy a Toyota sedan. He paid something like $1,200 (perhaps $1,800) for this brand new car. We laughed at him because Japanese cars were considered junk then. Now Toyota and Hondas cost so much to produce in Japan that US plants have been built for their manufacture.

Cars are very different now, but, had nothing changed that car that was $1,200 then would be $4,800 now..just because of currency depreciation of the dollar to the yen that created inflation in the US. The yen was over 400 yen per dollar then (in the 60s) and is about 110 yen per dollar now.

Second, it means that trips abroad will cost a lot more. If the dollar drops 25% to the euro, a hotel in Paris that costs $199 a night now, the price will be about $299 a night, if nothing else changes. Oil prices are likely to keep climbing so this also means that the air fare to get to Paris will be 10 to 15% higher as well.

Third, prices for everything will soar. The rising costs of imports (upon which we so greatly depend) will rise. This will filter through the entire US economic system. Take Walmart as just one example. Business Week’s Oct. 6 cover story outlined how Walmart’s $12 billion in imports from China last year accounted for a tenth of total U.S. Chinese imports. If the dollar drops 25% against the Chinese yuan, the cost of all those imports will rise about 25%. US workers will need higher wages to compensate for this. Businesses will need to charge more for their products to pay for the higher labor costs, etc.

Finally, one thing we can be sure of: some people will become richer in relative terms (because they jumped into inflation fighting investments). Tomorrow we will see what some of these inflation fighting investments are.

Learn more about fighting inflation by investing in emerging currencies, gold, silver, Ecuador, import-export, overseas markets and more. Join Merri, Thomas Fischer from Copenhagen and Steve Marchant from Ecuador and me at our September 15-16-17, 2006 International Business and Investing Made EZ course in North Carolina. Review where to invest and do business now and learn which markets and currencies may be strong in the year ahead. Learn more about Ecuador import and export from Steve. Our May course was overbooked and the September up date is coming along. Our free accommodations are reserved on a first come first served basis so do not delay! Go to http://www.garyascott.com/catalog/ibeznc.

June, 2006

 

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All contact copyright Gary A. Scott (1968-2006) unless noted otherwise