America is Slipping in the Currency Wars

America is Slipping in the Currency Wars

Ah, the almighty dollar!  If it were a building, it would be tall and colonial. If it were a career military officer, it would be an arrogant, five-star general.  And if it were a bell, its ring would be heard loud and clear throughout the world.

It’s hard to believe this flimsy green and white piece of paper, barely larger than two by six inches, can wield such power and influence.  Since discussions of foreign exchange rates can get complex, it’s useful to take a look at an index created by the Economist in 1986 to gauge the dollar’s relative strength.

In place of the common government metric of “a basket of goods,” the noted financial magazine has come up with one particular American staple – the McDonald’s Big Mac – to measure what it calls “purchasing-power parity.”  According to this theory of Burgernomics:

“If the local cost of a Big Mac converted into dollars is above $4.79 (its price in America), a currency is dear; if it is below the benchmark, it is cheap. In Pushkin Square a Big Mac costs 107 roubles, or $1.88 at the current exchange rate, two-fifths of the average price in four American cities. That in turn implies that the rouble is undervalued by 61%….”

According to this metric, as recently as January, 2016 the U.S. dollar continued to reign supreme over a vast number of countries, with the notable exceptions of Switzerland, Sweden and Norway.  It’s worth noting that Russia’s no longer in last place though, having been bumped by inflation-racked Venezuela.

But all is no longer secure in the land of the free and the home of the burger. According to a Reuters report, the dollar’s now hovering at “multi-month lows” because traders remain unpersuaded the Fed will modify its now-skittish outlook on rate increases.  The dollar’s also weakened against the yen, a development which, according to Alan Ruskin, global head of FX strategy at Deutsche Bank in New York, represents “an ongoing signal of underlying yen strength.”

If you’re concerned about sustaining value in your retirement account, these developments make it clear, again, that you need to diversify your assets if your portfolio is heavily weighted in dollars or dollar-denominated assets. It’s also a timely reminder that while it’s good to have liquid emergency funds and hedges against risky investments, paper dollars may not offer the security you’re looking for.

My long-acknowledged go-to asset, gold, is negatively correlated to the dollar, which, despite its traditional kingpin status, will always be vulnerable to currency wars and inflation. When the going gets tough for a country in the ongoing currency wars, that country will inevitably make sure it has sufficient physical gold in its coffers.  This is especially true when, like all aspects of the U.S. economy, it has a bulls-eye on its back, put there by both our enemies and our allies.  Why should you do any less for your own nest egg? This way, you can be assured if the United States ever slips further down on the Burgernomics currency metric, you’ll still be able to sleep well, live well…and get some fries with that.