- With the dollar weakening, buy euro-denominated securities;
that's what the smart money is doing.
-
- The Old World, long convinced of its cultural superiority
over the U.S., has at last got something more concrete to feel smug about.
After three years of lagging, Europe's 12-nation common currency, the euro,
is at parity with the dollar. And some forecasters think the euro is headed
higher over the next 12 months--Goldman Sachs says to $1.12 per euro, a
far cry from its alltime low of 82 cents in October 2000. The flight from
the dollar is a mixed blessing for the U.S. economy. It will make our exports
cheaper but contribute to selling pressure on our stocks and bonds.
-
- Currencies are volatile things and the dollar may yet
confound all the pessimism in coming months. Still, the forces working
to weaken the dollar today aren't likely to go away soon: U.S. accounting
scandals, widening trade and budget deficits, George Bush's steel tariffs,
terrorism fears. We have, says Goldman's chief global economist, James
O'Neill, "an unfortunate confluence of events."
-
- "In a postbubble world 'Buy America' is suddenly
seen as a risky alternative," says Stephen Roach, the Morgan Stanley
economist. Big European companies that formerly sold euros to buy dollars
for U.S. investments, such as France's Vivendi and Germany's Deutsche Telekom,
are reversing course.
-
- Snip: See Graph at website
-
- What's a U.S. investor, already suffering from a wilting
Wall Street, to do? If you can stomach the risk, join the antidollar crowd.
Ways to short the dollar--or, equivalently, go long the euro--include:
buying European government or corporate bonds; buying currency futures
contracts; and buying options on currency futures. Plenty of Americans
did quite well playing the last great weakening of the dollar. In order
to remedy the U.S.-Japan trade imbalance in 1985, the big five industrial
nations agreed to depreciate the dollar against the yen. The dollar was
in a bear market for the next two years.
-
- One attractive feature of euro-denominated debt is that
it pays a higher yield. When the euro was falling, that advantage was wiped
out by currency losses. Not a problem now.
-
- Why are rates higher in Europe? Because the European
Central Bank is solely focused on fighting inflation (think Germany in
the 1920s). The Federal Reserve has that mission, too, but also is charged
with buoying the U.S. economy. A two-year German government note yields
3.8% annually, while a comparable Treasury yields 2.6%.
-
- That yield spread is dwarfed by the potential gain (or
loss) from exchange-rate shifts. The euro has moved from 85 cents to $1
in the past year, so more appreciation to $1.10 or so is plausible.
-
- Why go for the euro and not the yen or some other currency?
Japan may be the world's second-largest economy and the yen also has improved
lately, moving from 134 to the dollar in January to 117 now. Trouble is,
Japan's own economic situation still is shaky. And its bonds pay practically
nothing. Other countries' securities lack the breadth and liquidity of
Europe's.
-
- http://www.forbes.com/forbes/2002/0812/110.html
|
