The U.S. dollar is on a roll...
Over the last eight months, the U.S. Dollar Index (which tracks the dollar’s performance against six major currencies) has gained 11%. It’s now trading at its highest level in 15 years.
This is one of the biggest stories in the investing world right now.
You see, the dollar is the world’s most important currency. When it makes a big move, everything from stocks to foreign currencies feels it.
• Yesterday, the U.S. Dollar Index jumped another 0.9%…
Strong U.S. economic data fueled the rally. Bloomberg Markets reported yesterday:
The Institute for Supply Management said Tuesday that its index increased to 54.7, the fourth straight advance, reflecting firmer output and the biggest pickup in orders growth since August 2009.
The data helped extend the dollar’s three-month advance, which has intensified since Donald Trump’s presidential election in November and was punctuated by a Federal Reserve interest-rate increase last month.
• There’s good reason to think the dollar will keep rallying…
You see, the Fed didn’t just raise its key interest rate by 0.25% last month. It also planned three more rate hikes for this year.
This, too, is a huge deal.
For the last eight years, the Fed has held its key rate near zero. This made it very cheap to borrow money. But eight years of rock-bottom rates have also made it difficult to get a decent return in U.S. savings accounts and bonds.
With the Fed now raising rates, U.S. assets should start to “pay more.” That will make them more attractive to foreign investors, which is good for the U.S. dollar.
But that’s not the only thing fueling this rally…
• The European Central Bank (ECB) and Bank of Japan (BOJ) are still “printing money”…
The ECB and BOJ hope this radical policy will stimulate their economies. But it’s much more likely to destroy the very currencies that these central banks are supposed to defend.
In short, the Fed is doing less harm to the dollar than the ECB and BOJ are doing to their currencies right now. Unless this changes, the dollar should continue to strengthen against the Japanese yen and the euro.
• History is also on the dollar’s side right now…
That’s because January has historically been the best month for the U.S. Dollar Index.
Since 2000, the U.S. Dollar Index has climbed 1.03% on average during January. That’s far better than the average monthly gain of 0.04%. It’s also much higher than the average return of 0.74% for May, which has been the index’s second best month over the last 16 years.
• A strong dollar is good news for everyday Americans…
It means the money in their wallets will buy more stuff.
But it’s bad news for people in other parts of the world.
To understand why, you have to think of a currency’s value as a ratio. It measures how many units of another currency it can buy. So, when a country’s currency is strengthening, another country’s currency is getting weaker.
• A strong dollar hurts the euro the most…
The table below shows the six foreign currencies that make up the U.S. Dollar Index.
You can see that the euro accounts for 58% of the index. It has more impact on the index than the other five currencies combined. This means the euro will almost certainly get weaker if the U.S. Dollar Index keeps rising. And that could mean big gains for many Casey readers…
|Japanese Yen (JPY)||13.6%|
|British Pound (GBP)||11.9%|
|Canadian Dollar (CAD)||9.1%|
|Swedish Krona (SEK)||4.2%|
|Swiss Franc (CHF)||3.6%|
• In August, Crisis Investing editor Nick Giambruno recommended shorting the euro…
Shorting is when you bet against an asset. If that asset loses value, you make money.
Now, a lot of people think that only sophisticated investors short currencies. But Nick found a way to short the euro that’s as easy as buying a share of McDonald’s.
In less than five months, Crisis Investing readers are already sitting on an 18% gain. But Nick thinks even bigger gains are to come. He explained why last month in the International Man Communiqué:
If it breaks below its March 2015 low of $1.046, it would pave the way for it to test parity with the US dollar (which hasn't happened since late 2002). If that happens, look out below.
Right now, one euro “buys” US$1.04. In other words, the euro is already below the critical support level Nick warned about last month. This tells us that it should keep falling.
You, too, can get in on this trade by signing up for Crisis Investing today. If you act now, we’ll even give you 120 days to decide if the service is right for you. Click here to begin your risk-free trial.
Chart of the Day
Dirt-cheap markets delivered big gains in 2016.
Today’s chart shows how stocks in Russia, Brazil, Poland, Hungary, and Turkey performed last year. You can see these “emerging” markets delivered an average return of 26%. That’s more than double the S&P 500’s 10% gain last year.
We point this out because these countries were the five cheapest countries heading into 2016. According to fund manager Star Capital, the average CAPE (cyclically adjusted price-to-earnings) ratio of these countries last December was just 7.9.
[The CAPE ratio is the cousin of the popular price-to-earnings (PE) ratio. The only difference is that it uses 10 years’ worth of earnings data instead of one year’s worth. Like the PE ratio, a low CAPE ratio means that a country’s stock market is cheap.]
Meanwhile, the five most expensive countries (Denmark, Ireland, Japan, the United States, and Switzerland) had an average CAPE ratio of 28.4. Unfortunately, investors in these countries didn’t “get what they paid for.” These countries delivered an average return of 0% last year.
This is important to remember. You see, most investors buy stocks after they’ve already made a big run. They overpay. This classic mistake often generates poor returns. It can also lead to big losses.
Still, investors shouldn’t buy stocks just because they’re cheap. After all, stock markets are usually cheap for a reason. Maybe a country’s economy is slowing. Or maybe its financial system is about to collapse.
Unfortunately, a valuation metric like CAPE can’t tell you why a country’s stock market is cheap. It can only tell you if stocks are cheap.
The good news is that we can help…
As you may know, Nick Giambruno specializes in finding dirt-cheap markets with huge upside. He especially likes markets that are "irrationally cheap"—where you have the chance to buy world-class businesses for next to nothing.
Nick’s had tremendous success with this strategy. Last year, he used this unorthodox investing approach to generate multiple 100%-plus winners for his readers. But he expects even bigger returns as we enter what could be one of the most volatile investing environments in decades.
You can learn about Nick’s top crisis markets for 2017 by signing up for Crisis Investing. Click here to begin your risk-free trial today.
Delray Beach, Florida
January 4, 2017
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