March 24, 2011

A Silent Currency Record

While the world’s attention was glued to Japan recently, another low-yielding currency has made a similar record movement against the US Dollar.  The Swiss Franc, also a traditional safe-haven currency, has quietly made its way towards successive new records against the US Dollar. On March 16 (March 17 for Asian markets), the Swissie reached an all-time record of 0.8860 against the greenback.


To put things into perspective and to understand why international investors been debunking the status of the US Dollar as the world’s reserve currency, take a look at this long-term chart below.  In the early 70’s just as the world switched from the untenable Bretton Woods agreement towards freely floating currencies, it cost about 4 Swiss Francs to buy 1 US Dollar. 40 years later, it only costs 0.9 Swiss Francs to buy 1 US Dollar. 


In other words, the greenback is now worth less than a quarter of what it used to be.  This has had severe implications in terms of the purchasing power of US investors.  It also raises the question as to how long the US government can continue to enjoy ultra-low financing costs without further depleting the value of the Dollar.  US companies have recognized this trend for quite some time as they have been shifting more and more of their earnings focus overseas.  By investing in companies with a broad international reach, investors could mitigate some of that loss of purchasing power.  They have also increasingly been looking towards precious metals (Silver just hit another multi-decade record above $38/ounce) and other commodities to balance the same decline.  Both demand-trends appear to be major stimuli for the continued rise in asset prices.  One would hope that the US Dollar has come to a tipping point towards reversing that multi-decade trend.  But aside from the fact that the greenback has been severely oversold, I’m having a tough time finding convincing arguments to stay in (US$) cash.

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