The Edmond Sun

March 15, 2014

THE ASTUTE INVESTOR: Why the dollar will get stronger

By Nick Massey
Special to The Sun

EDMOND — Two questions I hear most often are related to gold and to the U.S. dollar. In my January annual predictions column I wrote, “Despite fear of a collapsing U.S. dollar, the dollar will actually rise in value against most other currencies as other countries try to devalue their currencies to make their exports cheaper. This is the 21st century version of trade wars.”

Demographic research has shown that people spend money in predictable ways over the course of their lives. We, as consumers, spend a lot when we’re young. We take on a bunch of debt (for homes, cars, etc.) as we begin to raise a family. Then we pay down our debt and save for retirement. It’s pretty straightforward.

A general trend and belief has been baby boomer spending money drove the economy higher. This changed as the group got older and refocused on paying down debt and saving. The natural trend is now deflation and, of course, the U.S. dollar will get stronger.

Say what? Wait a minute. Isn’t the dollar supposed to crash and inflation go through the roof because of all the money printing? People tell me, “There is no way the U.S. dollar will get stronger. The Fed is printing money by the truckload. China is growing in importance every day. Other countries continually call for re-pricing international markets, like oil, away from the U.S. dollar. Clearly, in this area, you’re wrong.”

There’s just one problem with this anti-dollar view. People are using more of the U.S. dollar today, not less. It’s simple supply and demand. The Bank of International Settlements conducts a survey every three years on the use of currencies. The last one was in 2013. One of the measures in the survey shows the percentage of foreign currency transactions that include each currency listed. Comparing the 2010 figures to the 2013 results, the U.S. dollar gained ground, moving up by 2 percent and remained the most commonly used currency in the world. The euro, while hanging on to its ranking as the second-most used currency, fell by 5.7 percent.

What stands out is the gap between the two currencies. The U.S. dollar was involved in 87 percent of all foreign currency transactions in April 2013. The euro, the second-most used currency, was involved in only 33.4 percent of all transactions. And the gap between the two is getting bigger, not smaller.

As for the Chinese renminbi, well, it gained ground also. It moved from being included in 1 percent of all transactions to a whopping 2.2 percent. The percentage gain is huge, but the absolute number is almost a rounding error.

The facts that people quote when challenging the stronger dollar view certainly exist. The Federal Reserve is printing a mountain of money. The Chinese are flexing their monetary muscle in the international markets. Traders and investors across the world long have expressed a desire to move away from the U.S. dollar. However, these forces are not strong enough to challenge, much less change, the dominant position of the U.S. dollar in the near future.

The reason is that no currency currently serves as a reserve of anything.  The idea that there is a preservation of value in any currency went out the door with the gold standard more than four decades ago. Today, every currency is simply a floating gauge of value in relation to other currencies, with none of them backed by gold, oil, wheat, land or anything else. You can argue whether that is a good thing or not, but that is a story for another day and the gold standard is not coming back.

So the question of which currency will dominate markets comes down to matters like trade, ease of comparison and the efficiency of transactions.  Looked at from this point of view, the choice of the U.S. dollar is a no-brainer. It’s widely held, easily converted and is paired with every currency so that local prices are immediately understood by all parties.

The only way to unseat the U.S. dollar is to have our economic growth drop dramatically, while every other major currency player enjoys a major expansion. The possibility of these two trends occurring at the same time seems remote, to say the least. The exact opposite is most likely.

The U.S. is in the strongest position among the major players. Instead of losing ground, the U.S. dollar should enjoy further gains. As that happens, I think investors who have positioned themselves for a falling dollar will see their positions take a hit. They would be better off if they learned to give the U.S. dollar a little love. Thanks for reading.

NICK MASSEY is a financial adviser and president of Householder Group Financial Advisors in Edmond. Massey may be reached at Investment advice offered through Householder Group Estate and Retirement Specialists, a registered investment adviser.