What are the expert economists saying about the state of the dollar throughout the year? James Pethokoukis from U.S. News & World Report assembled some opinions on the dollar’s predicted performance for the paper’s Annual Investing Guide. The big issue is the trade deficit. The dollar has been falling, so will foreign banks give up on the dollar’s value and begin a massive sell-off?
Higher U.S. interest rates have served to counterbalance America’s huge trade deficit by paying foreign investors more to hold dollars. Now, with growth having slowed and the Federal Reserve Board on hold and perhaps ready to lower rates-and with its European Union counterpart raising them-it seemed a good time to sell. And while the dollar could dip a bit more, don’t expect a full-fledged rout.
Robert Brusca of Fact and Opinion Economics says the dollar should head lower this year but probably won’t. “China has no interest in dumping dollars and thereby starting a panic that would seriously devalue its $700 billion in U.S. government bonds…”
So for the short term, it sounds like the dollar will be fairly solid. That won’t stop me from keeping a portion of my investments in international funds.
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No less an investor than Warren Buffett has recently invested in foreign companies as a hedge against the declining dollar. For lesser mortals like myself, IShares EFA is a good way to play the foreign market through an international index EFT.