Will the dollar spend 2011 in the gutter? Our forecast definitively shows that it will.
The U.S. economy is still stuck in the depths of a possible double-dip recession. The Federal Reserve is doing its best to devalue America's currency. And foreign economies have so little faith in U.S. "recovery" that they're bypassing the dollar altogether in favor of the yen, yuan and even the euro.
But you can profit from the dollar's failure.
So stop crying and do something good for your portfolio.
We'll show you eight ways to take advantage of the dollar's pathetic performance in 2011.
You'll learn exactly which currencies will provide the best returns against the dollar and how to profit from them.
But first, let's take a look at exactly what will happen to the dollar, and the world's other big currencies, in 2011.
Euro To Yen
Not surprisingly, the euro is in for a rough time in early 2011. If EU members thought 2010 was bad, wait until they're deep in the currency gutter that's going to be the beginning of 2011.
The euro's slide will continue into the middle part of this year – extending what's already been the worst track record for the currency since 2005. But barring any major new fiscal catastrophes, that slide will turn into a climb somewhere around six months into 2011.
The optimistic Financial Forecast Center, an independent economic research service, predicts the dollar will hit a low of 1.424 euros in early 2011 then rise steadily to just 1.251 euros by June.But after mid-year, expect the uptrend to reverse. The euro will be back on top again, driving down the dollar.
Along with its European strength in early 2011, the dollar could also rally against the Japanese yen this year. But if it happens, the depreciation of the yen will be deliberate.
Other Asian countries have decided the yen is more reliable than the dollar. And they are shifting their cash reserves from dollars to yen, forcing the value of the yen higher and the attractiveness of Japan's exports lower.
The yen neared its strongest level against the dollar in 15 years in 2010. That's bad for any economy, like Japan's, that's dependent on exports. And now the Japanese government is looking to intentionally weaken its currency to improve its export business.
The possibility of Tokyo making new efforts to weaken the yen have moved 2011 estimates for the Japanese currency up to 90 yen per dollar.
But I wouldn't recommend gambling on Tokyo this year. Intentional debasement of a currency is a risky business. It could easily backfire. The market could correct for it. Or the government could change its mind about the idea.
Dark Days for the Dollar
Looking beyond the euro and the yen, there's a long list of currencies the dollar will do nothing but weaken against this year. And this is to be expected.
Long term, a weaker dollar is inevitable based on the laws of economic reality. The Federal Reserve's efforts to deal with the ongoing financial crisis are a Keynesian fantasy. And the dollar's value will fall each time the Fed pumps more "liquidity" into the economy.
America's central bankers are taking the wrong monetary approach. No nation in recorded history has ever bailed itself out by debasing its currency the way the central bankers are doing now. Ever.
Even Philadelphia Federal Reserve President Charles Plosser has said he "remained skeptical" about the Fed's monetary easing strategy. He's even gone so far as to say a weaker dollar and a renewal of inflation in the future would be a likely result. And Plosser's perspective isn't even taking commodities or the markets into account.
The Commodities Factor
It's a vicious circle. The dollar weakens. Commodities prices rise. And the dollar weakens further on speculation over those higher commodities prices.
This year we'll see gains in gold, silver, oil and other powerful commodities. Those gains will in turn, knock the dollar down a peg in absolute terms and bring it down against commodities-linked currencies, like the Canadian and Australian dollars.
We may also see a domino effect in the dollar versus the Swiss franc, Brazilian real, Turkish lira and Russian ruble.
And like I said before, in the second half of the year, after some of the smoke from the various European debt crises clears, we will have to contend with the British pound and the euro rising against the U.S. dollar. And those are just the currencies worth mentioning.
Is the Dollar Dead?
Continued weakness in the dollar is leading some to question its dominance as the world's reserve currency. The euro and China's yuan are both gaining status against the U.S. dollar. And it's happening not because of outside influence from China or the EU. It's solely due to the mismanagement of America's currency and the country's growing debt.
A shift away from the dollar may already be under way. China and Russia have "renounced the U.S. dollar" and instead are using their own yuan and rubles for direct trade between the two countries.Whether this means an inevitable collapse of the dollar's reign as king of the world's currencies, we'll have to wait and see.
In the short-term, the dollar will remain the reserve currency of the world. The U.S. financial markets are the deepest and most liquid and America still has a dominant global trading position. But the long-term could be another story altogether.
According to the International Monetary Fund, the number of the world's currency reserves denominated in dollars is still at a healthy 61%. But that represents a 5% drop from its levels in 2002-2003. We'll have to wait and see if that trend continues in the next decade.
In the meantime, take advantage of the weak dollar to find gains in a few, select, foreign currencies.
The adventurous should head directly to the foreign exchange and futures markets. Go long on the Swiss franc, the Australian dollar and the Chinese yuan in coming months to collect the rewards of an anemic U.S. dollar.
But more risk-averse investors, who prefer a less volatile approach, could take advantage of the weak dollar using exchange-traded funds (ETFs) that focus on the Swiss, Australian, Chinese, or even Brazilian, currencies — all will be winners in 2011.
Some top ETF candidates include:
- PowerShares DB U.S. Dollar Index Bearish (NYSEArca: UDN): This "inverse fund" moves up in price when the dollar declines against a basket of six currencies, meaning you're just betting on a weaker dollar, not an advance by one single foreign currency. However, given other opportunities and the speculative nature of the currency markets, I advise limiting your investment to no more than 2% of your investing capital.
- CurrencyShares Australian Dollar (NYSEArca: FXA): This fund invests in baskets of trust shares (issued in units of 50,000) backed by Australian-dollar deposits, thus directly tracking the exchange rate with the U.S. dollar. The fund has a recent market capitalization of $665 million.
- WisdomTree Dreyfus Brazilian Real (NYSEArca: BZF): For investors seeking exposure to the blossoming South American markets, this fund is a good choice. It tracks exchange rates between the Brazilian currency and the dollar. The market cap is $148 million.
- Market Vectors Chinese Renminbi ETN (NYSEArca: CNY): An exchange-traded note (ETN) – rather than an ETF – this fund tracks the S&P Chinese Renminbi Total Return Index, which follows the exchange rate of the dollar against the yuan. The fund has a fixed number of shares (1 million) and a recent market capitalization of roughly $25 million.
- WisdomTree Dreyfus Emerging Currency (NYSEArca: CEW): If you think the world's developing economies are likely to outperform the developed nations – and want to profit if their currencies also appreciate – this fund is a solid option. It tracks currency values and interest rates of emerging nations in Asia, Latin America, the Middle East and Africa. The market cap is $293 million.
For the second half of 2011, if the situation in Europe stabilizes, you could also consider:
- CurrencyShares British Pound Sterling Trust (NYSEArca: FXB): The British pound took a hit due to its exposure to the Irish debt crisis. But when the pound regains some of the ground it lost against the dollar (and it will regain that ground), this fund will rise with it. The current market cap is about $150 million.
- CurrencyShares Euro Trust (NYSEArca: FXE): This fund will rise in price when the euro finally begins to rise against the dollar. The market capitalization is $354 million.
[Editor's Note: America's Most Wanted Terrorists… Work On Wall Street.
You may pass them on the street and not think twice about who they are… or what they're capable of. But they have caused more damage and destruction than al-Qaeda ever could. They're stripping away what used to be the right of every American – a real shot at creating a worry-free retirement.
Meet our country's financial terrorists. While there's nothing we can do to stop them, there is, in fact, a way to protect yourself from their next attack.]