US Dollars

The US Dollar (often called the 'Greenback') is the official fiat currency of the United States and its territories. Unlike currencies backed by a physical commodity like gold, a fiat currency's value is derived from government decree and the public's trust in that government's economic and political stability. The US Dollar (USD) holds a unique and powerful position in the global financial system. It is the world's primary reserve currency, meaning central banks and major financial institutions worldwide hold vast quantities of it. This creates constant global demand. Most major commodities, like oil and gold, are priced in USD, and it dominates international trade settlements. For an investor, the dollar is more than just cash; it's a benchmark, a potential safe haven asset, and a source of currency risk that can significantly impact your portfolio's returns. Understanding its movements and its role is fundamental to navigating the global market.

For both American and international investors, the value of the dollar is not just an abstract economic indicator; it has direct and tangible effects on your investment returns. Ignoring it is like sailing without checking the tides.

Historically, the US Dollar has been the ultimate safe haven. During times of global economic crisis or geopolitical turmoil, investors and institutions ditch riskier assets and “fly to safety” by buying US assets, particularly US Treasury Bonds. Since you need dollars to buy these bonds, this surge in demand drives up the dollar's value relative to other currencies. This reputation is built on a few pillars:

• Deepest Markets: The US financial markets are the largest and most liquid in the world, meaning you can buy or sell huge amounts of assets quickly without drastically affecting the price.
• Global Trust: Despite its challenges, the world still largely trusts the US political system and the independence of its central bank, the Federal Reserve (the Fed).
• Reserve Status: As the world's reserve currency, there is an underlying, permanent demand for dollars to facilitate global trade.

However, a wise investor never assumes the past will perfectly predict the future. While the dollar's safe-haven status is currently intact, its long-term stability depends on the US managing its debt and maintaining global trust.

This is where the rubber meets the road for your portfolio. Fluctuations in the exchange rate can either amplify your gains or deepen your losses on foreign investments. Let's use an example. Imagine you're a European investor who wants to buy a US stock.

1. You convert €10,000 to dollars when the exchange rate is €1.00 = $1.10. You now have $11,000.
2. You buy shares in a US company. A year later, the stock has done okay, and your investment is now worth $11,550 (a 5% gain). You decide to sell.
3. Scenario 1: The Dollar Weakens. The exchange rate has moved to €1.00 = $1.20. When you convert your $11,550 back to euros, you get only €9,625. Despite your stock gaining 5% in dollar terms, you've lost nearly 4% of your original euro investment!
4. Scenario 2: The Dollar Strengthens. The exchange rate has moved to €1.00 = $1.05. When you convert your $11,550 back, you get €11,000. Your 5% stock gain is now a 10% gain in your home currency.

The same logic applies in reverse for a US investor buying European stocks. This exposure is called currency risk, and sophisticated investors sometimes use strategies like currency hedging to mitigate it.

A true value investor looks for discrepancies between price and intrinsic value everywhere—and that includes currencies. While you can't calculate a precise “intrinsic value” for a dollar bill, you can assess whether it appears cheap or expensive relative to other currencies and its own history.

One of the classic tools for this is Purchasing Power Parity (PPP). The theory, in its simplest form (often humorously called 'Big Mac Index' economics), suggests that over the long run, exchange rates should adjust so that an identical basket of goods costs the same in any two countries. For example, if a basket of goods costs $120 in the US and €100 in Germany, the PPP-implied exchange rate is $1.20 per euro.

• If the actual market exchange rate is $1.10 per euro, the dollar could be considered overvalued against the euro. A value investor might see this as an opportunity to buy German assets, as they are “cheaper” in dollar terms and could provide a currency tailwind if the rate moves back toward its PPP level.
• If the actual rate is $1.30, the dollar might be undervalued.

PPP is not a short-term trading tool, but it's an excellent mental model for thinking about long-term currency value.

No empire lasts forever, and that includes financial ones. Value investors are paid to be healthily skeptical, and it's worth monitoring the long-term pressures on the dollar's dominance. The two main concerns are:

• US National Debt: A continuously rising mountain of government debt could eventually erode confidence in the US's ability to pay its bills without printing an excessive amount of money, which would devalue the currency.
• De-dollarization: This is the slow-moving trend of other countries (like China, Russia, and Brazil) attempting to conduct more trade in their own currencies, reducing their reliance on the dollar.

These are slow, generational shifts, not reasons to panic and dump your dollars tomorrow. However, being aware of them helps you understand the complete picture and reminds you that in investing, nothing should be taken for granted—not even the Almighty Dollar.