Why currency markets are important for equity investors… (Instock, New York)
By K.C. Grainger
New York City - Aug 6 - For the average investor, are the currency markets
important? Certainly, exchange rates can make travel abroad more
expensive, as the weak euro is doing now for Europeans. Or sometimes
currencies create a bargain in foreign countries as Japanese travelers
experienced from a strong Yen in the 80s. But assuming you have no
travel plans, and only invest in your home country, does the value of your
currency matter? Without a doubt, the answer is yes.
Many investors are unaware that currency fluctuations were a major
contributor to the US stock market crash of 1987. It is commonly
assumed that the market was simply overvalued, and due for a harsh
correction. The stock market declined forty percent in about two months.
On average, such a bear market decline, would take approximately a
year. But overvaluation was not the cause of the crash. Much of the blame
goes to the arrogance of the G-7 nations (now G-8) that set the stage for
the largest collapse and loss of market value ever seen up to that time.
In their infinite wisdom, the G-7 decided well before the crash that they
wanted a decline in the value of the US dollar of 40%. The American
dollar had become too strong and a decline was overdue. An
examination of the charts indicates that the US dollar futures contract fell
from 164 in 1985 to 105 just before the crash of 1987. However, the G-7
did not realize that by creating and engineering a decline in the value of
the dollar by such a high percentage, would lead to massive selling of US
stocks by foreign investors, which contributed to the Crash.
Today, we have a dollar that, in my opinion, is again overvalued, but not by
40%. I expect that the US dollar will weaken, and with this decline the
stock market could become vulnerable to a harsh bear market. As history
has shown us, it is a good idea to watch for turmoil in the currency
markets, as it can be a key determinant of the performance of the stock
market.
So when the euro finally recovers versus the dollar. When you decide it's
time to take a trip to America since your travel expenses have come
down. Examine your US stocks, because they might be ready for a fall.
By K.C. Grainger
New York City - Aug 6 - For the average investor, are the currency markets
important? Certainly, exchange rates can make travel abroad more
expensive, as the weak euro is doing now for Europeans. Or sometimes
currencies create a bargain in foreign countries as Japanese travelers
experienced from a strong Yen in the 80s. But assuming you have no
travel plans, and only invest in your home country, does the value of your
currency matter? Without a doubt, the answer is yes.
Many investors are unaware that currency fluctuations were a major
contributor to the US stock market crash of 1987. It is commonly
assumed that the market was simply overvalued, and due for a harsh
correction. The stock market declined forty percent in about two months.
On average, such a bear market decline, would take approximately a
year. But overvaluation was not the cause of the crash. Much of the blame
goes to the arrogance of the G-7 nations (now G-8) that set the stage for
the largest collapse and loss of market value ever seen up to that time.
In their infinite wisdom, the G-7 decided well before the crash that they
wanted a decline in the value of the US dollar of 40%. The American
dollar had become too strong and a decline was overdue. An
examination of the charts indicates that the US dollar futures contract fell
from 164 in 1985 to 105 just before the crash of 1987. However, the G-7
did not realize that by creating and engineering a decline in the value of
the dollar by such a high percentage, would lead to massive selling of US
stocks by foreign investors, which contributed to the Crash.
Today, we have a dollar that, in my opinion, is again overvalued, but not by
40%. I expect that the US dollar will weaken, and with this decline the
stock market could become vulnerable to a harsh bear market. As history
has shown us, it is a good idea to watch for turmoil in the currency
markets, as it can be a key determinant of the performance of the stock
market.
So when the euro finally recovers versus the dollar. When you decide it's
time to take a trip to America since your travel expenses have come
down. Examine your US stocks, because they might be ready for a fall.
