Profit from the falling dollar like a master

Warren Buffett knows a thing or two about the impact of monetary policy on investments.

By InvestorPlace Nov 4, 2009 6:04PM
By Jim Woods

down arrowWarren Buffett's doing it, and you should, too.

Doing what? Trying to profit from a falling dollar. Buffett's purchase of Burlington Northern (BNI) was, at least in part, an investment in the falling dollar. And that's something you should be doing, too.

Last week the greenback fell to new lows versus rival foreign currencies. And though there has been a bounce in the value of the buck since the U.S. Dollar Index hit a new 52-week low, I suspect that this is much more of a trading bounce than anything else.
Normally, the value of the dollar doesn’t get too much attention in the financial media.  I think this is partly because it’s not the easiest thing to fully comprehend.  As a financial writer, I also know that when you start to discuss the declining dollar with investors, their eyes tend to glass over. 

But investors do need to understand the reasons behind the dollar's decline. Why?  Because it will affect the stocks you own. What's more, everything the U.S. government is doing in terms of fiscal policy will continue hurting the U.S. dollar over the long term.

The law of supply and demand is perhaps the biggest reason why the greenback will continue to falter. Like every other good or service, the price of dollars is based on supply and demand. 

In the case of the greenback, dollars are in overabundant supply.  The Federal Reserve has been running the printing presses at full speed of late to try and stem the deflationary tide caused by the “Great Recession,” and to help fund President Obama’s grandiose spending plans. 

Does anyone think the Fed will stop this current practice? If you find someone who does, let me know. Until we see a cessation of increased dollar supply, expect the value of the greenback to languish -- and expect the demand side of the equation to fail to keep pace with supply.

The second reason why the dollar will likely continue to decline is due to risk aversion. When risky assets such as U.S. and world equities rise, the dollar falls. 

We witnessed this phenomenon in reverse back in late-2008 and early 2009, when the greenback surged as stock values plummeted. But since March, the U.S. equity market has surged, and the value of the dollar versus rival foreign currencies has plummeted. 

According to a recent editorial in The Economist, “Domestic American investors may be driving the relationship, repatriating funds in 2008 when they were nervous about the state of financial markets and sending the money abroad again this summer because of a perception that the global economy is reviving.” I think this assessment is dead on.

As we continue seeing evidence from countries like China, Brazil and even the United States that the economy is coming back to life, we are liable to see more of this risk aversion behavior, and that will continue putting downward pressure on the U.S. dollar.

Fortunately, there are plenty of ways investors can profit from a falling U.S. dollar.  Click here to see 5 Winners That Will Profit from a Weak Dollar.

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