The U.S. Dollar: Our Safe Haven Currency

Reuters recently reported that 26 publicly-traded corporations filed for bankruptcy in the first quarter of 2015. RadioShack, Wet Seal, Caesar Entertainment Group… all kaput. Compare that to the 54 that filed in 2014… we’re already at half that!

What’s worse is that the fundamentals driving these bankruptcies aren’t anywhere near letting up, so this trend will only continue throughout the rest of the year.

One of the largest headwinds to growth — not just for corporations, but also for the whole economy — has been and will continue to be the U.S. dollar.

And it’s only going to get worse from here! For better or worse, the dollar is a safe haven currency. When the world is imploding around us, we turn to the dollar, the global reserve currency, for safety. As the reserve currency, there’s just nowhere else to go!

This bull market is long in the tooth, which means a crisis or bear market could come at any time. When the tide changes, people will flock to the dollar…. and given the amount of leverage in the system, this will amplify the dollar’s rise.

The rub is that many multi-national technology firms — such as Hewlett-Packard and Sandisk — often generate more than 50% of their revenues from overseas. As the dollar keeps rising, that will make it even more difficult for companies that operate in the currency to profit from exports!

So, not only is a strong dollar a problem now, but it will only become a bigger problem in a crisis. It will come at the worst time, too, as demand all over the world deteriorates even further due to weak economic conditions.

We are already starting to see this negative impact in Q2 as well as companies release their earnings reports.

Many people are passing this off as a short-term problem. But when they realize it’s an issue that isn’t going away anytime soon, they’ll change their expectations. When that happens, stock prices will fall more than people may currently be prepared for.

As for the dollar, the negative impact from its strength will likely be longer and more pronounced than most people expect… especially when you consider it will only get stronger.

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John

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Categories: Currencies

About Author

In 2007, John Del Vecchio managed a short only portfolio for Ranger Alternatives, L.P. which was later converted into the AdvisorShares Ranger Equity Bear ETF in 2011. Mr. Del Vecchio also launched an earnings quality index used for the Forensic Accounting ETF. He is the co-author of What's Behind the Numbers? A Guide to Exposing Financial Chicanery and Avoiding Huge Losses in Your Portfolio. Previously, he worked for renowned forensic accountant Dr. Howard Schilit, as well as short seller David Tice.