By Nigam Arora
No politician in the United States wants Americans to be worse off and deliberately take steps that are bad for an average American investor.
However the policy of destroying the dollar, though well-intentioned, will lead to American investors being worse off in the long term.
In the short term, investors are celebrating a lower dollar. But it is also prudent to start thinking of defensive steps to preserve wealth.
The dollar fell to a three-year low after comments by the Treasury Secretary Mnuchin on Wednesday in support of a weaker dollar. It was the biggest one-day fall in 10 months. Before his inauguration, President Trump declared that the dollar was too strong. This started the decline in the dollar. But Mnuchin’s comment is like drilling a hole in a dam that is holding back a flood. Initially after the hole is drilled, only a small amount of water flows out. But if the hole is not repaired or more holes are drilled, pretty soon the dam loses its structural integrity and causes a flood. In this case if the flood happens, it will be average investors losing money in the stock market, like they did in 2008 and 2000.
I am politically agnostic. My sole focus is to help investors.
My longtime readers know that I have often expressed opinions that were unpopular at the time. To understand this minority opinion, let’s start with a chart.
Please click here for an annotated chart of the Dollar Index Bullish Fund /zigman2/quotes/209727862/composite UUP +0.16% that represents the dollar index /zigman2/quotes/210598269/delayed DXY +0.04% . Please note the following from the chart:
• The major support is far below where it is trading now. This means from a technical perspective, there is still a lot of room for the dollar to fall farther.
• Before the present fall, a pattern of lower lows was already established.
• After lower lows, the rally failed.
• Now there is another lower low after Treasury Secretary Mnuchin’s comment.
• Collectively all this paints a very bearish picture for the dollar. However in the short term the dollar is very oversold and a bounce up is typical.
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In the short term, a weaker dollar is good for stocks, as the earnings of the companies that are in S&P 500 /zigman2/quotes/210599714/realtime SPX -0.46% and Dow Jones Industrial Index /zigman2/quotes/210598065/realtime DJIA -0.92% go up. This is reflected in the moves in broad-based ETFs such as the SPDR S&P 500 ETF /zigman2/quotes/209901640/composite SPY -0.49% and the PowerShares QQQ /zigman2/quotes/208575548/composite QQQ +0.14% .