Many articles have been written by other people forecasting that the dollar will decline, but I disagree. The huge and growing federal deficit is a concern, but it can be handled and reduced by switching to a European system of government controlled health care. Much of the deficit can be attributed to health care costs.
A popular myth is that Americans don’t pay as much in tax as people in other Developed countries. But some articles written about this topic seem to only focus on federal income tax and not on payroll tax, state income tax, etc. Also, most countries, except the U.S., don’t tax their individual citizens on offshore earnings held in corporations located offshore. Many wealthy Europeans have their business held by a corporation located in tax haven countries while they work and live in a high tax country. In the U.S. that is not allowed for individuals, but it is allowed for individuals who are citizens of other countries.
The new tax law actually increases taxes on the biggest, most dynamic companies because it stops them from getting a tax free offshore situation and forces them to pay a minimum of 12.5% U.S. tax on earnings of offshore companies. This will open the door to future federal tax increases as well as state income taxes copying the new federal law. The new law cuts taxes for some small businesses but the failure rate for small business can be at times high, in which case if one is losing money, one won’t have to pay taxes anyway. The tax cut for individuals is a sham because it zeros out using an intermediate term inflation adjusted average over several years. John Mauldin said it actually raised the total percentage of all taxes (as a percent of all taxes collected) paid by those in the high income brackets. This is obvious among resident of high tax states who are professional two-income couples. The whole thing “sunsets” out of existence in another 8 years since the cuts were passed using the filibuster-proof Byrd amendment that requires a ten year deficit breakeven formula. I don’t see the new tax cut law as much of a cut since it mostly goes to the top 500 companies, and they mostly are the ones with the offshore tax sheltered subsidiaries, so they will have to pay more tax since their offshore companies are now going to be taxed globally.
Looking at a chart of the dollar since the 1971 exit from the gold standard, the dollar plunged for a few years, which is logical, but then it began to form a bottom and a trading range of about 80 to 100 points, excluding some special periods. There were two huge exceptions to the trending range on the upside during the high interest rate Volcker Fed era of 1979-1986 and the U.S. tech boom of 1998-2000. Also there was an exception to the trending range during the great crash of 2008 which took three years to resolve. Currently it is at 89.4, right in the middle of my trimmed mean estimate of its trading range.
The dollar denominated bonds pay the highest rates of any developed country except Australia. Since Australia is at risk of a real estate crash, a banking crash, and a rising unemployment from a reduction in commodities exporting, thus on a risk adjusted basis, the dollar based bonds are better than Aussie bonds. Eventually Euro area investors and global investors will tire of the risk of further weakness in the EU and get fed up with negative yields in the EU and they will move to dollar denominated bonds. It is possible to get 3.5% (tax-adjusted for Munis) yield in a portfolio, with intermediate term duration, of mostly investment grade bonds denominated in dollars. Thus the fundamentals look good for the dollar. In the EU a AAA bond with a 5.5 year maturity yields 0.01%, that’s one hundredth of a percent, basically zero. It may be worth it for some EU citizens to simply buy dollar based bonds unhedged and simply live with the risk of the dollar fluctuating in a trading range of plus or minus 10% from its current value. The big objection to buying dollars is fear that the U.S. would devalue because of gigantic deficits, but I think in a few years (or maybe later this year during a recession) the dollar will be a safe haven currency.
It is amazing that investors will take on too much risk and overpay for stocks simply to get a 2% or 3% dividend and incur the risk that stocks could drop 50%, yet in the case of foreigners buying dollar denominated bonds to get a 3.5% yield they apparently want the currency risk hedged, which is why they don’t buy the dollar. Eventually during another Greek debt crisis then investors will change and the dollar will go up.
More news articles have been written recently about the new Cold War in Europe. If that becomes true it would heighten the risk of owning Euro based bonds. An increase in global tensions would highlight the importance of safe haven locations like the U.S., Canada, Australia, etc. and downgrade the appeal of the EU and Japan.
Investors need independent financial advice about the risks of being fooled by fears of a declining dollar.