Your Investments: Dollar-shekel stability

Investors should take a slightly more macro approach in what is really happening with the greenback against the shekel.

By AARON KATSMAN
November 17, 2010 23:25
2 minute read.
Your Investments: Dollar-shekel stability

Shekel. (photo credit: ru.jpost)

One of the most common questions I receive from clients is how to preserve the value of their portfolios in the face of a sinking US dollar. While I answer that it’s important for people living in Israel to hedge against a potential fall in the dollar, I think investors need to take a slightly more macro approach in what is really happening with the greenback against the shekel.

While all currencies move up and down on a daily basis, the dollar-shekel exchange rate has been remarkably stable over the last three years. Since the end of November 2007 we usually have been pretty close to 3.8 shekels per dollar.

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While a strong shekel gets the headlines, it’s important for investors to drill down a little bit and see what is actually happening. And in our case, what is actually happening is that the dollar is stable.

STRONGER DOLLAR?

While the dollar has been falling globally since the Korean War, it has had periods of strength. Those periods of strength have also corresponded to big stock-market moves higher. While conventional wisdom says a weak dollar is good for exports, which will help the US extricate itself from the nasty recession, a weak dollar is horrible for the economy.

Aside from the fact that it is inflationary, rarely good for any economy, a weak dollar often means a weak economy. It means foreigners don’t want to invest there, and local companies move operations overseas. Just think about Israel over the last seven to eight years. You have a stronger, stable currency, and global investors have poured in billions and billions of dollars to invest here. This was not happening back in the day of high inflation and a weak shekel/lira.

ELECTIONS

One of the least talked about ramifications of the recent massive Republican gains in the US mid-term elections is the impact on the currency. The dollar has rallied since the election. My gut feeling is that if the Republicans can show the world they are serious about implementing fiscal constraint and put the reins on government spending, the dollar will continue to strengthen.

The Americans need to show they are serious about tackling both budget and debt issues. If they buckle down and do it, and it appears that progress is being made on both fronts, the dollar will again become attractive.

After all, the alternatives to the dollar are nothing to write home about. Pressure is on Ireland to accept a European bailout. We could see Italy and Portugal facing these same issues shortly. While until this week the currency market still seemed deaf as to a sovereign credit crisis within the euro zone, it appears that once again this issue is coming front and center.

So the euro has problems and the Japanese economy is really messed up as they try and work through their own debt issues. This potentially leaves the dollar as the big winner in the global currency wars if, and I admit it’s a big if, the US can get its fiscal house in order.

aaron@lighthousecapital.co.il

Aaron Katsman is a licensed financial adviser in Israel and the United States who helps people open investment accounts in the US.


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