US and the Foreign Currency

As tensions over sovereign debt flare, foreign currency risks are rearing their ugly head.  For most of the past decade a weak dollar has created a tailwind for the prices of foreign assets.  As risk aversion increases however, the dollar tends to rally as it is perceived to be the reserve currency of the world.  This has pushed the value of assets overseas down further than even our markets have retraced.

In a world where there will be increasing scrutiny on government debt loads, currency volatility will surely increase.  This is important when investing in companies that have customers located in other countries and accept payments in other currencies.  In today’s increasingly globalized business world it is hard to find many public companies that do not do some sort of business overseas.  Therefore, when looking at potential stocks to buy you must determine what countries in which their foreign revenue are derived.  Then determine if those countries currencies could possibly be at risk of major market disruption.

Over the long term the dollar will most likely weaken unless our historically imprudent government suddenly becomes frugal and we fix our large trade imbalance.  Both of those events seem unlikely.  This makes it likely that over time foreign stocks will continue to have the wind at their backs.  However, until the markets hash out which countries have been irreparably damaged by the financial crisis there will be greater foreign currency market volatility.   You will notice greater price movements in your stocks as a result.

One final note is that China’s currency is tied to the U.S. dollar so there is no fluctuation between the two at this time.

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