The Sinking U.S. Dollar

"Oh, my God, the sky is falling in! It could mean the end of the United States as we know it. The strong U.S. dollar-representative of the strongest economy on earth-is crumbling and with it the future". The alarmists and conspiracy theorists are jumping for joy. "We told you so. And yes, we're smarter that the lot of you," they say under their collective breath. Pure, unadulterated hogwash.

The "chicken little" run for the hills thinking offers investors a real opportunity. You see, the U.S. dollar is just making the long sought after correction needed to make U.S. exports much more competitive. From 1995 to 2002, the U.S dollar rose over 35% in relation to other floating currencies, namely the Euro and Canadian dollar. Since 2003, the U.S. dollar has fallen back 35% from what most economists felt was an overvalued U.S. dollar.

While there are problems with the U.S. Federal Budget Deficit and trade deficits, they pose not imminent crisis. No doubt better fiscal policies need to be enacted in Washington but the real pain in a falling dollar lies with our trading partners who hold huge reserve of U.S. dollars. They don't want to see a large devaluation and they don't want the dollar to become too competitive either. That's the real truth. And that is the reason that our trading partners will keep buying U.S. treasuries while more responsible heads try to sober-up the drunken sailor. So, shun the panic and look for the opportunities.

Most of the U.S trading partners in Asia and Latin America have more or less pegged their currencies to the U.S dollar. This means that most of the current devaluation is not exported as price increases to the U.S. As a matter of fact, export opportunities for the U.S. are increasing with each down tick of the dollar against the "floating currency countries"-more specifically Europe. Stocks of U.S. companies who produce and export things such as transportation equipment, computer and electrical products, chemicals and industrial machinery will greatly benefit from a falling dollar. These in-dustries provide 70%-80% of U.S. exports to Europe and Canada. These same industries provide 68% of U.S. exports to China who has recently revalued their currency. As U.S. exports go up, profits go up, employment goes up and tax revenue to help balance the federal deficit go up. On the other hand, in exchange for the benefits of a lower dollar, U.S. travelers going abroad-particularly to Europe and Japan- will find it more expensive overseas. Sounds like a good trade-off.

A good strategy for stock option traders would be to locate solid U.S. ex-porters in the industrial sectors mentioned and consider buying long term out-of-the-money call options or bullish spreads. To many "in the know", a weaker dollar-even though it sounds bad-is mostly a good thing. The only danger is if trading partners and foreign investors lose confidence in the dollar and flood the currency market with a tidal wave of dollars which could have a disastrous effect but not only the U.S would be hurt but also the World as foreign dollar reserves plunge in value. Moreover, the U.S. dollar is the world's trading currency. To replace it would require much more crisis management and political investment that it would cause tremendous disruptions. To let the dollar crash would be a foolish mistake.

Traders love it when panic and emotion cloud the thinking of the market place and create real opportunities. Trust in the basic fact that most investors will do what is best for them when they understand what they must do to protect their own interests. This means that there won't be a run on the dollar. When other investors wake up and act logically and without fear, the window of maximum opportunity usually has already slammed shut.