Location: New York
Author: Lenny Broytman
Date: Monday, January 7, 2008
The US economy has been hanging on by a thread for well over a year now and the decreasing value of the dollar hasn't been helping much.
Although the dollar's drop has not been too positive, many domestic economists are warning investors that a sharp increase in the dollar's value would not be the easy solution that many people assume it would be. This is simply because a sharp rise in the dollar's worth would most likely cut their way into foreign stock returns.
“Those people who are waiting for the dollar to crash should wake up and smell the coffee, because it has already happened,” said Ed Yardeni, president of Yardeni Research in Great Neck, N.Y., the same man who predicts that the dollar will strenghten in 2008, especially when compared against which the dollar has lost some ground with. “Those three currencies have been painfully strong in recent months, to the point where central bankers are either thinking about or starting to lower interest rates,” Yardeni added.
It is crucial to point out that these same strategists are not, by any means, advising investors to pull out of foreign markets and suggest that being globally diversified is always a good idea. “I don’t think the currency is going to hurt you that much over the next couple of years; it’s just not going to help you,” Yardeni said.
Yardeni does however think that American investors who have a stake in foreign markets might be forced to rebalance their portfolios right about now if they plan to keep their heads above water in 2008.
In fact, Yardeni says that he believes American investors should be taking an average of 25 percent to 35 percent of their portfolios and sinking money into foreign markets.
Speaking of investing in foreign markets, Morningstar reports that the European stock fund category has had an average annual returns of more than 25 percent over the course of the last five years.
“I think European growth is likely to slow, weighed down by the strong euro, high oil prices and slower U.S. growth,” says Stuart Schweitzer, the global markets strategist at JPMorgan Private Bank. “I think it is time for investors to consider taking profits on some of their European equities.”
Michael Joynson, a director for global equities at Citi Global Wealth Management, a Citigroup unit, insists that the dollar will not strengthen nearly as much as some strategists might be saying it will. According to many Citigroup economists, the dollar will fall a bit more against the euro early this year but will end 2008 at around $1.47, near its current level. If this occurs, Joynson says that it is very possible that exchange rates will squeeze European carmakers and pharmaceutical firms that do a great deal of business in the US. At the same time, European companies doing a vast majority of their business in Europe will not really be hurt by a shaky euro.
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