By Sara Nunnally, Editor, Smart Investing Daily, taipanpublishinggroup.com
We asked, and you’ve supplied. We love hearing from you, whether you have questions, comments or suggestions for Smart Investing Daily topics.
Today, I’d like to answer a question from Smart Investing Daily reader Y.M.:
What is your outlook for the U.S. dollar against the Swiss franc and the euro both near term (1 to 3) months and by year end?
This is a great topic… We’ve commented on the U.S. dollar in general in the past, but currencies are a two-way street, and value (since we’ve been off the gold standard) is relative to another currency.
When Y.M. asks about the U.S. dollar against the Swiss franc, we need to determine how the U.S. dollar is valued against the Swiss franc. In other words, how many Swiss francs does one U.S. dollar buy? As of midday yesterday, $1 bought just under 0.93 francs.
(We’ll get to euros in just a minute.)
A year ago, that same dollar bought 1.07 francs. Now, here’s where things get tricky. Because currencies are valued against each other, a couple things could have happened to cause this swing in value.
1. The Swiss franc could have appreciated (gained value).
2. The U.S. dollar could have depreciated (lost value).
3. A combination of 1 and 2.
There are a couple of ways we can look at this to find out which of these scenarios has occurred. We can look at each of these currencies against a third currency. By doing this, it’s like having an independent judge making the call.
We can also look at the U.S. Dollar Index, to see how the dollar has performed against a basket of major currencies.
Take a look at this chart:
This chart shows March futures traded on the U.S. Dollar Index over the past year. From this chart, we can tell that the U.S. dollar has most certainly depreciated.
Is it possible that all the other currencies in this basket just gained in value as to make the U.S. dollar appear to depreciate?
I’m sure a lot of folks wish that were the case, but it’s not. Here’s how we know.
This chart compares the euro to the Australian dollar over the past year. A year ago, one euro bought about AUD 1.48. Now, it buys AUD 1.37. The euro has dropped in value against the Australian dollar.
The Australian dollar is the independent judge that I talked about earlier, and I chose it also because it is not one of the currencies in the basket of currencies that makes up the U.S. Dollar Index… But the euro is.
So let’s sum up these two charts then. The euro has lost value over the past year, which means that the U.S. Dollar Index is showing a depreciating dollar, not just because of strength in other currencies, but because of stronger devaluation of the U.S. dollar itself.
And all of this relates back to our original question about the U.S. dollar against the Swiss franc.
The Swiss franc has not really appreciated in and of itself. Indeed, some analysts, like our own Michael Sankowski, editor of Currency Profits Trader, said back in February that the Swiss franc looked overbought.
Some investors had been using the Swiss franc as a bastion of safety.
Daily FX noted on March 2, 2011:
The US Dollar and Swiss Franc are poised to extend gains after outperforming in the overnight session as the surge in oil prices continues to stoke broad-based risk aversion.
To me, this means that the appeal of the Swiss franc is linked with increasing oil prices — and a depreciating dollar. June futures for this currency saw a huge spike in buying volume on Wednesday, which could mean investors are anticipating upside potential.
But be careful…
The Swiss franc — as compared to the U.S. dollar — has climbed past resistance, but only just barely.
If it finds support at this level, we can expect an extended move higher over the next three months… Perhaps something like the movement we saw back in mid-August 2010 after the consolidation in July 2010.
I wouldn’t expect as smooth a climb, though.
(Investing doesn’t have to be complicated. Sign up for Smart Investing Daily and let me and my fellow editor Jared Levy simplify the stock market for you with our easy-to-understand investment articles.)
As for a year out, I’ll be honest — I can’t say. It depends on a lot of things. First and foremost, the U.S. dollar and the flimsy recovery. If oil prices remain high, it could cripple the recovery, and for sure the Federal Reserve will churn out more dollars in order to try and keep our economy afloat. That could mean a higher Swiss franc /U.S. dollar relationship a year from now.
Remember that to value a currency, you must compare it to, or pair it with something to determine relative value. This is why all FX markets are quoted in pairs.
On the other hand, if the crisis in Libya resolves itself to the point where oil prices drop significantly (and we don’t see any other uprising that would endanger oil production), then we’ve got a whole other ball game, and any theory on where the Swiss franc will head would have to be re-evaluated.
But let’s get back to the euro.
This is a big mess that can’t fully be defined — partially because the U.S. dollar and the euro have been battling it out for “fastest depreciating currency.”
OK, that’s an exaggeration, but both currencies have been trending down against other major currencies because of economic concerns, none of which are easily or quickly resolved. Since the beginning of the year, however, the euro has been gaining ground against the U.S. dollar.
Now, analysts are worried about debt from certain countries like Portugal and Greece taking the wind out of the euro’s sails… And I would trust that for the near term.
Again, though, I won’t hazard a guess as to where the euro will be versus the dollar a year from now.
One thing’s for certain, though… the economic concerns affecting both currencies will more than likely still be in play. And that could mean that investments in the dollar/euro pairing should be shorter-term trades, playing the monthly or quarterly movements.
I hope this article begins to answer some of Y.M’s questions, and explains a couple ways to determine how a specific currency moves.
Editor’s Note: One powerful currency could show a 992% return on one trade… Currency Profits Trader editor Michael Sankowski can show you how you could make a fortune with one of the safest currencies on the planet. Follow this link to read his exclusive investment report.
About the Author
Sara is Managing Editor of Smart Investing Daily. As Senior Research Director and global correspondent, Sara Nunnally’s diverse resume includes studies in art history, computer science and financial research. She has appeared on news media such as Forbes on Fox, Fox News Live, and CNBC’s Squawk Box, as well as numerous radio shows around the country. Most recently, Sara co-authored a book with Sandy Franks called, Barbarians of Wealth.
As Senior Research Director, global correspondent and managing editor of Smart Investing Daily, Sara has traveled all over the world in search of the best investment opportunities to recommend to her readers, be they in developed economies like France and Italy, in emerging markets like the Czech Republic and Poland, or in frontier terrain like Vietnam and Morocco. Her unique “holistic” approach of boots-on-the-ground research has given her an edge in today’s financial marketplace as she searches for the next investment opportunities in hot sectors like alternative energy, currency markets and commodities.