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| As The Dollar's Slump Continues,
Two Foreign Currencies Stand Tall The U.S. dollar has been the loser in the "funny money" game for the last three years. And investors who haven't paid attention to call for diversification outside of it could be losing ground on their investments, even if stocks have moved up during the mini-rally. If this message hits home in your portfolio, then this month heed the recommendations our "international correspondent on the scene," Pillar One Partner Michael Checkan. From his stops in Geneva and Zurich, Switzerland, part of a round-the-world business trip, Michael took the time this month to assess the five currencies most often mentioned as U.S. dollar alternatives, and fine-tuned this list to his two top picks for getting out of the dollar and into the black. Dollar's Down, So What's Up Greetings from the "Gnomes in Switzerland." I am spending a week here in Geneva and Zurich meeting with private bankers and independent asset managers. As a member of the Club's Wealth Advisory Panel, I share my findings with our Investment Director, Alexander Green, and you. I am finding that much of the talk here is about the continuing fall of the U.S. dollar. Many of the foreign exchange specialists believe that the dollar will continue to decline through the end of this year. And while the reasons for the falling dollar are not new (namely, soaring levels of consumer, business and government debt along with record U.S. trade and balance-of-payment deficits) the fact that they've continued to pound away at the dollar this long still makes diversifying into foreign currencies a smart play. Now, throw in the shaky U.S. economy, low interest rates, growing unemployment and a plunging equity market, and you've got aconvincing case for getting out of the U.S. dollar altogether. But, what currencies have been the winners? Recently the answer has been most of the major foreign currencies: the euro, Swiss franc, Norwegian kroner, Australian dollar and the Canadian dollar. Let's take a look at each of these currencies and its current status. Our Diversification Hero The euro came into existence as a unit of measure in January 1999 as a result of 12 European countries voluntarily giving up their autonomous national currencies for the new European currency. The value of the euro started at US$ 1.18/euro and eventually hit a U.S. dollar low (in 2000) of just 82 cents/euro. The turnaround in the value of the euro began in 2001 and accelerated after January 2002 when it became a physical banknote and began circulating throughout the world. The euro has recently appreciated to a level of US$ 1.14/euro, which is a gain of over 25% since the beginning of 2001. The largest bank in Switzerland, UBS, continues to be conservatively optimistic about the euro-projecting the currency to strengthen to US$ 1.20/euro by year end. The two "convenient account" banks, Anglo Irish Bank in Vienna and Jyske Bank in Copenhagen, are even more optimistic. They both look for the U.S. dollar to continue to decline and the euro to exceed US$ 1.20. My thinking is more in line with the "convenient account" banks. Swiss Franc: Performance Like a Fine Swiss Wat-...Well, You Know The Swiss franc has been the best-performing currency against the U.S. dollar during the past 30 years. Due to the close trading links between the "Euro Zone" and Switzerland, UBS believes, price changes will equalize over time. At the moment Swiss inflation is much lower than Euro Zone inflation, and this favors the Swiss franc in relationship to the U.S. dollar. However, a UBS representative recently remarked the Swiss franc will move closely with the euro, "...with six and 12 month forecasts of US$0.7634/franc and $0.7463/franc, respectively." Or, as an Anglo Irish Bank, Vienna exec states, "We look for $0.7463/franc to be eroded, for losses [down] to the $0.7852/franc to $0.7911 levels." Both the Swiss franc and euro should be considered "core holdings" and held outside the U.S. The Kroner's a Goner The holding of Norwegian kroner was a "war play" and did very well last year. However, the Norwegians' main export is oil, not salmon, so now that the Iraq War is over, oil prices are falling dramatically. And the Norwegian economy is weakening. Therefore, the kroner is now overvalued and is not recommended by banks as an investment against a falling dollar. Australian Dollar: Another "G'day" on the Horizon I recall that in September 2000, while attending the Sydney Olympic Games, that it took two Aussie dollars to make one U.S. dollar. In two weeks, I'll be back in Sydney and can expect to only receive about 1.55 Aussie dollars for one U.S. dollar. What's going on "Down Under?" The Aussie dollar has reached multi-year highs because it is backed by a commoditydriven economy. The gold price is very important to the Australian dollar since gold is one of the country's main exports. Until February 2003, gold performed very well before dropping sharply, as the war in Iraq ended. Recently prices have stabilized then risen, and so has the Aussie dollar. A comment about gold since it is very important to the value of the Australian dollar: Gold is in a mini-bull market and is expected to continue to rise in price, which is bullish for the Aussie dollar too. The outlook for the Aussie dollar is very bright. Is It Time to Get "Loonie?" Canada's dollar, nicknamed the "loonie" after a diving waterbird featured on the one-dollar coin, is up 11% since New Year's Day. I recall while working in Toronto in the mid-1960s that the Canadian dollar was at a premium to the U.S. dollar. However, it has been diving ever since like the loonie, until earlier this year when it hit bottom. The U.S. dollar has been weakening, but the economic fundamentals in Canada are solid. Also, the loonie's strength can be attributed to higher interest rates than in the U.S., a strong domestic economy and the recent rise in world energy prices. Canada is a net energy exporter of both oil and hydroelectric power to the U.S. Although UBS tends to be neutral on the Canadian dollar, others are not. The fact remains that Canada is the best-performing industrialized economy. Canada's growth rate is expected to be moderate in 2003-still the IMF forecasts Canada will lead the G-7 in economic growth again this year. Meet Your Two "Core" Currencies The falling dollar creates opportunities for investors who are willing to think "outside the box"-or the U.S. dollar. The U.S. dollar was strong for seven years before weakening in 2001, and it is only a few years into the bearish dollar cycle. The dollar is expected to decline throughout 2003 and into next year. The currencies I have mentioned are examples of alternatives to the U.S. dollar...some good, some not as good. The Swiss franc and the euro should be considered as part of your "core" holdings. The Swiss franc has been the best-performing currency against the U.S. dollar and is the most conservative of the two currencies. The Australian and Canadian dollars are "commodity" currencies. The commodity markets in general (and the gold and energy markets, specifically) have been undervalued for many years. Many, including myself, still believe that commodity prices are undervalued. Therefore, they should prove to be a safe haven against future losses of the U.S. dollar's purchasing power in the event that its erosion continues for the foreseeable future.
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