Don't Despair Over the Dollar

Rachel Haig: I'm Rachel Haig from Morningstar.com. Lately there has been a whole lot of talk about the dollar. At the end of November, it hit 15-month lows against major currencies and then this week it hit 5-week highs. Here with me to talk about whether or not we need to make a whole lot of this is Morningstar's markets editor, Jeremy Glaser. Thanks for joining me, Jeremy.

Jeremy Glaser: You're welcome, Rachel.

Haig: So why has the dollar been so weak lately?

Glaser: I think a reason is that investors have been fleeing the relative safety of the dollar to riskier assets, so that could be currencies that are viewed as little bit riskier or into assets such as stocks or corporate bonds, or asset classes that people were avoiding for a long time because they were worried about the world economy. As things are beginning to stabilize, people are shying away from the relative safety of the U.S. dollar.

Haig: Right. And what's with this week's rise of the dollar? Is there any reasoning behind that?

Glaser: Yeah. I think you're seeing the exact opposite, that now people are starting to get a little bit afraid again. Dubai really shook up the markets a lot. People saw that essentially a government entity, Dubai World, had to not pay debt for six months or have their interest payments for six months really rattled the markets.

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Moody's downgraded Greece's debt again, which is a member of the Eurozone. It looks like they're going to be in a lot of trouble.

There are a lot of concerns in Japan where they are passing another stimulus package and more quantitative easing there to try to bring their economy out of trouble. We're seeing a lot more issues around the entire world and people are now looking to relative safety of the dollar and are moving more assets into that, which is certainly helping the dollar get a little bit stronger.

Haig: Right. And it definitely seems like investors are hanging on to every movement of the dollar, but is it really something to pay that close attention to or get very worried about?

Glaser: Yeah. There certainly has been a lot of hand-wringing about the dollar falling so much and being so far off from its highs that it reached 15 months ago. But I don't think it's something the average investor really needs to be that worried about. It's not that the global economy is all of the sudden saying the United States is worthless and they are not going to be able to stand by their currency.

In fact we see that when there is crisis in the world, people are coming back to the United States. So I think what we're really seeing is a return to the levels that we saw at the end of 2007. There certainly is weakness in the dollar, but I don't think it is something that means that we are imminently going to be in a crisis or that imminently there's something going to implode in the United States economy.

And in fact the lower dollar can have some positive effects. When the dollar is weaker, it's better for United States exporters. It could help reduce the trade balance, which is something that has been a big systematic issue for the United States for a long time. It could force Americans to kind of save more, to become more of an export-driven economy, which I think is going to be good for bringing us out of this economic recession and for helping fuel further growth.

So do we want to see some enormous fall in the dollar, some sort of crisis in currency? Absolutely not. But I think this relatively mild weakening compared to other world currencies that we have seen over the last months is not such a huge deal for investors and isn't something that people need to be so worried about.

Haig: All right. Well that's interesting. What are your thoughts then on people who are moving into gold as a hedge against the dollar, do you think that's a smart move?

Glaser: Certainly there has been a lot of people who have decided that gold is where it needs to go. We've seen gold continue to hit high after high after high, and I think that there probably is some place in a lot of people's portfolios for precious metals and for commodities, but I think people need to understand before they invest in gold that it is not really an investment like buying a stock or buying a bond in which you have access to a string of cash flows that the business is producing or you have access to potential appreciation there.

What you're really buying is a precious metal that you're hoping that somebody else will take off your hands at a higher price in the future. I think if we look at historical returns for gold, it doesn't look fantastic, and you might think that, OK, it's insurance, but if the insurance is so expensive when you buy it, it might not be worth it.

So I think that while gold might play some role, I think right now at current prices moving a ton of money into gold to hedge against the supposed catastrophe of the dollar is probably not going to serve most investors well.

Haig: Well, thanks for the insights, Jeremy.

Glaser: You're welcome, Rachel.

Haig: For Morningstar.com, I'm Rachel Haig.