October 6, 2014
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There’s lots of talk circulating nowadays about how the U.S. economy is getting stronger, which is causing the U.S. dollar to experience a period of strength.

That’s what we’re being led to believe, and to a certain extent, we want to believe it too.

The dollar is indeed getting stronger. With the Fed ending its asset-purchase program, otherwise known as quantitative easing (QE), and their plans to raise interest rates to nearly 2% by 2015, the dollar index is rising. Given these variables, some currency analysts claim that the dollar is set to continue its upward trajectory into the long term.

But America’s economy is by no means a fast-growing economy. At best we will see slow, gradual improvement — which doesn’t bode well for a stronger dollar as interest rates are likely to stay well below expectations for a long time.

However, the dollar’s current period of strength presents us with an opportunity to take advantage of its purchasing power and exchange it for currencies that are bound to make substantial gains.

Using Dollar Strength to Buy the Dips

It’s one of the first pieces of advice every young trader gets — buy the dips.

And as long as you are making investments that you believe will generate greater returns in the long run, buying the investment you want at a reduced price is about as good as it gets.

And given the current strength of the U.S. dollar, that’s the opportunity we have in the foreign currency market, and it’s an opportunity that’s better than anything you will find in the S&P 500, Dow Jones Industrial Average, or the Nasdaq.

But, as with any great opportunity, it won’t last long. And you’ll want to take advantage of it before time runs out.

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Right now, the dollar is experiencing what will be a short-lived period of strength, because its ultimate destination is down .

Look at the past hundred years. Since the Federal Reserve was created in 1913, there has been one thing it has without a doubt done to the dollar — devalue it.

From 1913 to today, the United States dollar has lost 97% of its purchasing power.  That means what $1 was worth in 1913, is now worth $0.03. Another way to look at it is what you could buy for $1 in 1913 would now cost you $33.33.

Granted, there have been a few times since 1913 when the dollar experienced flashes of strength, even though its overall trajectory has been on a downward turn. In these moments, it always pays off to short the dollar on this temporary strength of the greenback by investing in foreign currencies.

And thanks to investor overreactions, as they tend to do when with any uncertainty in the world, the past four months have seen the dollar strengthen. And since the dollar is worth more, that means foreign currencies are cheaper in relation to it — and this dip in price represents an ideal opportunity to get into the currencies that are most likely to appreciate in the years to come.

But why this sudden surge in the dollar?

It’s simple — this new-found strength in the dollar today is tied to investors’ expectations of an interest rate hike cycle coming from the Fed. And that is precisely why this opportunity to invest on the dip in foreign currencies won’t last long.

But here’s the thing. I completely believe that the Fed is going to raise rates next year. But, as Jeff Opdyke and I have written about often. interest rates are not going to rise by any significant amount. Too much debt means they simply can’t afford to raise rates by any significant amount, because if they did by any more than a minuscule degree, interest payments would balloon in size.

It’s when investors realize this simple fact that we will begin to see weakness in the dollar again.

At that point, the dollar will rejoin its century-long trend and continue to lose value for decades to come, certainly in relation to other currencies.

Time to Add Strong Currencies to Your Portfolio

Just as you would use a temporary moment of weakness to add to a stock position, you should treat your currency pairs the same way.

Whenever you get an opportunity like this, it’s time to buy strong, stable currencies on a dip — currencies like the Chinese renminbi, Singapore dollar, Australian dollar, and the Indian rupee to name a few.

These currencies are already in great shape, and they’re only going to get stronger as their economies continue to expand, exposing their currencies to even more growth.

But the dollar’s fleeting strength also poses a great time to grab strong currencies that are currently stumbling due to their own temporary factors.

Consider the political tensions that have sent the Russian ruble tumbling, or the presidential elections in Brazil that have sent the Brazilian real lower. Once this conflagration with Ukraine fizzles out, the global market will have to contend with Russia. Their influence over the oil market and general economic expansion make this not only necessary, but inevitable. And Brazil is arguably one of the leading emerging markets in the world, and their economy is bound to pull out from its slump.

When you look ahead, maybe a decade from now, these are the currencies that will possess considerable purchasing power — certainly much more than the dollar.

Right now, there is a brief opportunity to buy on the dip and grab these currencies on the cheap. And trust me, the dollar will hop back on its century-long trend and continue to fall — so if you’re going to make this move, do it quickly.

Regards,

Chad Shoop

Editor, Pure Income