For nearly a year and half now many foreign countries (mainly developing countries, but Australia is in the mix) have been increasing interest rates and increasing reserve requirements. This summer the Federal Reserve’s Quantitative Easing II will be ending. A national election is upcoming in 2012. As usual, a number of events are happening and are upcoming that can impact the performance of your portfolio.
I’m not much for big predictions, but I think it’s a good idea to at least think about shifts in trends and how such shift could impact your investing game plan. Bear with me as I shoot off a few random thoughts…
What happens when the Fed finally starts to increase interest rates? It’s bound to happen some day soon, right? Free money (or nearly) can’t exist in perpetuity. At least I don’t think so. When rates begin to increase, what will that do for the dollar? I suppose if every other country in the world is doing the same (increasing rates), then it’s a wash, but that sounds like some type of text book situation.
If we hold that the recovery continues, will we come out stronger that Europe? If so, does this mean that the dollar begins to regain some of its strength?
What if Washington gets the deficit under control and drives the current account deficit down? That would be a positive catalyst for the dollar. I think we could agree that the public sentiment wants deficit spending reduced, but will current and/or future politicians have the will to do so?
In the case that the dollar gets stronger, what does that mean for commodities? What does it mean for precious metals? Gold is driven up right now based on anxiety and fear. Increased faith in ‘the system’ would presumably cause investors to migrate away from gold. Other commodities might be hit as well. Oil is priced in dollars and therefore a stronger dollar would lead to lower oil prices, all else being equal.
Questions like those above are good for any investor to consider. Right now it’s hard to think about a strong dollar bull run, but if it does occur is your portfolio ready? If not, what type of plan can you devise to act accordingly? No one wants get caught unprepared.