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Post September 11th Outlook for the US Dollar


Michael Checkan

The US currency is higher than where it was against the Euro, the English Pound and the Japanese Yen before September 11th. The Dollar, although still weaker, has recovered against the strong Swiss Franc.

In less then two months since the attacks, the US has declared War on Terrorism and began bombing Afghanistan, Americans have grown fearful of bio-terrorism, and the US economy is in recession.

The American stock markets shut down the week of the attacks, but after a post-reopening plunge, they have rebounded to pre-September 11th levels.

The economic dislocation has been severe throughout the US economy, yet the Dollar has dramatically recovered. Why is this and will it continue?

The primary reason for the recovery of the Dollar is due to the intervention of the Federal Reserve and other central banks. These central banks’ liquidity infusions have helped to restore global capital flows, and that has supported the Dollar.

History has taught us that central banks can influence foreign exchange markets in the short-term. However, they cannot dictate the long-term direction of the markets. The fundamentals of one economy versus those of another, along with perception, will ultimately dictate the real value of a currency.

I am not bullish on the fundamentals of the US economy.

For example, when the President was inaugurated about 10 months ago, budget officials predicted a $313 billion surplus for 2002. In his first budget message, Bush announced plans to cut taxes deeply and still retire $1 trillion in debt in just four years.

Today, the surplus is expected to disappear in 2002 and no one is talking about retiring debt. The latest congressional projections expect the government to drain almost all of the Social Security surplus to operate at current levels through 2011, imperiling the retirements of the baby-boomer generation.

Now, we are at War, and it will be a long War against terrorism. There will be severe dislocation in the US since this War is to be fought not only in Afghanistan but against terrorism here in the US.

The outlook for the US Dollar in the medium to long term does not look bright based on the fundamentals. The responsible thing to do is to diversify assets into other currencies such as the Euro and the Swiss Franc. No prudent individual would place all his or her assets into one stock or one investment. Likewise, no prudent individual should place all assets into one currency.

Clearly, the action to take is to diversify assets into different currencies and to different parts of the world. However, some may say this is unpatriotic. I disagree. It is prudent and patriotic to be currency diversified.

Is it unpatriotic to invest in IBM because they are diversified internationally and most of their income originates from outside the US? Of course not. This is a global world and investing abroad is not unpatriotic but simply the prudent thing to do.

Michael Checkan is President with Asset Strategies International, Inc. of Rockville, Maryland, a firm specializing in precious metals, foreign exchange and overseas asset protection. They are also one of the principal developers of the Perth Mint Certificate Program.

Copyright © 2001
The Investor's Library has reprinted this copyrighted article with the permission of the copyright owner, Asset Strategies International Inc.

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