Forex rate comparison in USA after 9/11

Many of the world’s most successful, best-managed multi-nationals are U.S. companies. If you want to own an IBM, an Apple, a Tupperware or a McDonalds, to name a handful of my long-time U.S. favourites, you have to invest in the U.S. market. You can name Canadian alternatives to any of these companies, of course. Each will be much smaller than its U.S. counterpart, less geographically diversified, have far fewer patents, and less potential for worldwide growth.

Most Canadian investors recognize these advantages, yet they hesitate to buy U.S. stocks. They are afraid of the high U.S. federal budget deficit and debt, high unemployment, falling real estate prices and so on. Many investors assume these factors guarantee that the U.S. dollar will lose value in the next few years.

These factors do influence foreign-exchange rates, but only indirectly. The most direct cause of shifts in foreign exchange rates is the flow of so-called ‘hot money’ across national borders. Hot money consists of funds held by investors who are willing to abruptly move from one country to another in search of better returns or greater safety. They make these moves in response to a wide variety of economic, political and military factors.

When a country’s national currency loses value on the foreign exchange market, its politicians often denounce the move as manipulation by unprincipled speculators. Some hot money is in the hands of speculators, but financial officers of multi-nationals are involved as well. Multi-nationals routinely move huge sums from one country to another, to fund business operations. They decide on the timing of these moves in much the same way that you decide if now is a good time to buy a new car or stock up on tuna fish – not exactly a scientific process.

The U.S. dollar hit a peak around $1.62 Cdn. in early 2002, a few months after the 9/11 terrorist attacks. At that time, many ‘hot-money’ investors felt the U.S. was the only place on earth that was safe from the terrorists.

The U.S. dollar stayed between $1.50-$1.60 U.S. for the rest of 2002, when hopes ran high that early U.S. military success in Afghanistan would continue and gain momentum. As you know, things didn’t work out that way.

While the Afghanistan war was still going on, the U.S. invaded Iraq. Soaring military spending, coupled with weak military results, undermined confidence in the U.S. dollar. From the peak around $1.60 Cdn. in early 2002, the dollar fell 44 per cent to a low around 90 cents Canadian in September 2007. That’s when serious doubts began to emerge about the future of Lehman Brothers. It was also around then that large numbers of economists and investors began to think that the U.S. was in deeper economic trouble than ever before, due to the collapse of the U.S. housing market.

At 90 cents , the U.S. dollar was at the opposite end of the sentiment spectrum of five years earlier. In early 2002, the hot money was thinking “fortress America”. By September of 2007, the hot money was thinking “fall of the American Empire”.

The hot money is mostly smart, but hardly clairvoyant.

Thereafter, sentiment shifted back in favour of the U.S. dollar. It moved up to $1.32 in the next 18 months, a 46 per cent gain. Once again, it had gone to the other end of the sentiment spectrum. The hot money figures that if the world economy is headed for a replay of the 1930s Depression, the U.S. dollar is the safest place to be.

After hitting $1.32, the U.S. dollar worked its way down to its current level, near parity with our Canadian dollar. I’d say this was due mainly to investor uncertainty over Obamacare and other new U.S. laws and regulations. Investors don’t like uncertainty, even if they support the politicians that caused it. Following the 2008 election, President Obama and the Democratic Party had large majorities in both houses of the U.S. Congress. That meant they could pass virtually anything they wanted, regardless of investor reactions. In addition, North Korean war threats and Iran’s nuclear program also weighed on the U.S. dollar.

Since the Democrats lost control of the U.S. House of Representatives in 2010, further investor-rattling legislation is at least two years away, and only if the Democrats win in 2012. Till then, the Democrats have to work with the Republicans to pass legislation.

This resembles the situation in the 1990s, under President Bill Clinton. It also resembles our present minority government. Both periods enjoyed moderate legislation, prosperity and a strong currency. The same thing could happen again.

The hot money is still wary of the U.S. dollar, but that could change as the U.S. economy continues its grudging improvement. Meanwhile, the North Koreans are acting less aggressive. Trade sanctions and sabotage are hurting Iran’s nukes, and it may take till 2015 for Iran to produce its first warhead.

My guess is that the U.S. dollar’s next big move will be upward. It could trade well above par in the next two years.

I’m sticking with Canadian banks and Canadian resource stocks, since they have competitive advantages over their U.S. counterparts. But many top U.S. multi-nationals look highly attractive right now, despite the risk of U.S. dollar weakness.