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Posts Tagged ‘Currency’
When the financial crisis first hit in 2008, the economic and political collaboration between Europe & America was unprecedented. That isn´t happening anymore.
Europe´s citizens (UK included) are now enduring massive spending cuts while the USA is still stimulating its economy.
Or, to put it another way, Europe has checked itself into rehab while the USA wants to inject steroids a little while longer.
Why?
Setting aside the theoretical pro´s and con´s, a big part of the reason is that the US Dollar is the world´s reserve currency and the USA is the only country that can print it. A very large portion of global imports and exports, including crucial commodities like oil, are all based in dollars.
On the one hand, that makes quantitative easing a lot easier, but on the other, countries that hold US dollars (particularly major oil exporters and China) are not too happy about how those actions are diluting their existing reserves.
In the short term however, these tax breaks and stimulus packages should ensure the US Economy has a healthy 2011. It might even continue to be fine in the medium term, but they´ll have to address the debt situation eventually, because it is clearly unsustainable.
Real long term recovery does not involve the US government pumping money into the economy for years on end - that is a once in a generation activity. It is far more important that the private sector figures out new ways to produce goods and services that US citizens and other countries want to consume.
Warm Regards
Colin
On the otherhand, if I was selling or buying real estate in Brazil, Mexico, Canada or Australia, I´d be quite worried about how sudden currency movements could severely disrupt carefully laid out investment plans.
Levity aside, we do seem to be in the middle of a period where a burst bubble, record house price lows, high rental yields and a falling US dollar are all combining to make a terrific buying opportunity for the right kind of real estate in fundamentally sound locations like Florida.
Regards
Colin
People predicted dire consequences for the dollar during the height of the recession, most of which never materialized. Then again, history has taught us several times not to underestimate the incredible strength and resilience of the US economy.
Over the past two years the €/$ rate has varied from $1.24 - $1.59, with an average of $1.41. It is now $1.27, more or less the same as it was in Oct-Nov 2009 and in Feb-March 2010.
Despite the unpredictability of all this, our feeling is that the euro will continue to weaken against the dollar for some time. It´s difficult to think about how this can be used to your advantage in the abstract so let´s use a Mosaic property costing $75,000, which is priced 65% lower than its peak.
Three months ago it would have cost you €55,000 to purchase $75,000. Now it would cost €59,000. It´s tempting to think that you´ve missed the boat as the price has “gone up” by €4,000 and/or that you´re not getting a 65% discount anymore. Both are misleading.
Look at it the other way. You pay the €59,000 and in a few months time the US/EU exchange rate moves from $1.27 to $1.17 (very possible). If you convert your $75,000 back to euro you´ll get €64,000. Have you lost €4000 or gained €5000?
Put your money to work
There´s also the rental income you can earn (good luck getting 10% in an EU country from a €60,000 property), the capital appreciation potential (prices have still plenty of room to fall in most EU countries) and above all, the fact that your money is working hard in an appreciating asset in a recovering economy rather than languishing in a bank in a slow economy generating 1-2% interest. Isn´t it better to read positive news about the US economy when you have assets there?
Florida property provides a lower cost asset, at a higher yield and significantly better capital appreciation potential than anything comparable in Europe.
More importantly, it is vital that investors start thinking about diversifying away from euro assets and into income generating assets in other currencies. You do not want to have all your money in euros when the US market is thriving and the euro currency outlook is weak and uncertain due to rogue member states.
Kind Regards
Colin Murphy
Torcana.com
With the pound and euro continuing to strengthen relative to the dollar, your hard earned cash can now stretch very far indeed. If you wanted $60,000 in late May it would have cost you around €45,000/£40,000. Now it will cost €40,000/£36,500. That’s quite a difference.
So a weak dollar is great news for those seeking to purchase US property from abroad, but as many of our readers working in the financial industry will know, the prospect of a consistently weak dollar is of real concern to finance ministers, company bosses and traders around the world.
If one were to listen to the US authorities the message is pretty much the same every week, “it is very important for the US to have a strong dollar“. They haven’t been taking much action to backup that message though.
As any first year economics student will tell you, a weak currency boosts exports and restricts demand for imports, thus improving the economy and lowering the trade deficit. This might suit the US in the short term but it certainly doesn’t suit the EU or Asia, both of whom want to sell their goods and services to the US as cheaply as possible to kick start their own economies.
The other big worry revolves around the strategies big countries like the US, Britain, Germany, Japan and China will pursue to withdraw the massive assistance they’ve been providing to prop up their economies. That’s a story for another blog though.
Kind Regards
Colin Murphy
Torcana.com
