Why a Strong Dollar Hurts

Patriotic investors like a strong U.S. dollar, while profit-oriented investors prefer a weak dollar. Why is that? As of late, there’s been a strong inverse correlation between the greenback and U.S. stocks. Stocks rally as the U.S. dollar falls and vice versa.

This makes sense, as the strong dollar cuts into profits of U.S. companies exporting to other countries. A strong dollar makes U.S.-made products more expensive and therefore less attractive.

The reason we are even talking about a strong dollar, is because contrary to the expectations of many, the buck did rally after June 2. Due to the government’s lack of fiscal responsibility, most Wall Street gurus expect inflation to rear its ugly head, leading to a weakening dollar.

Since June 2, the U.S. Dollar Index has climbed from 78 to 82, a big move when it comes to currencies. This came to no surprise to the ETF Profit Strategy Newsletter. On June 3, subscribers received the following note: “Against popular belief, the US dollar should actually remain strong, at least for the next 1-3 years. Why? Extreme bearish sentiment surrounding the US dollar is pointing towards a rally which should begin shortly, if it hasn’t already.”

But what about inflation? Here’s the explanation given by the newsletter: “The sheer amount of outstanding U.S. debt should prove bullish for the longer term. Here’s why: The dollar is by far the most inflated currency. It is also the most commonly used currency in the world. As such, most of the debt – and toxic assets – in the world is dollar denominated. As those toxic assets continue to deflate, U.S.- denominated wealth will continue to shrink. The law of supply and demand teaches us that scarcity of any product results in higher prices. In other words, the fewer dollars in circulation the more valuable the remaining dollars will become.”