Dollar's Depreciation Inflates All Assets

There's a rule of thumb in markets, an inverse relationship between the dollar and common stocks that has been especially prevalent the past several trading sessions. When stocks rise, the dollar weakens. When stocks go down, you're likely to see the currency strengthen.

So it has been with the dollar and the S&P 500.

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"People sell dollars and buy assets priced in dollars," explains Keith R. McCullough of Research Edge LLC, a New Haven, Conn., market service, referring to assets like foreign currencies or securities denominated in foreign currencies, gold, oil or even real estate or whole companies. This trade has worked out splendidly this year as the dollar has dropped 16%, but common stocks are up 50%-60%, or more than three times the decline in the dollar's value.

It's brilliant. You make huge profits by turning dollars, 63% of the world's foreign exchange reserves, into assets that protect against the dollar's decline--and then some! Oil has doubled, and so has copper. Gold is up a surprising 25% this year, and energy and commodity prices are also higher in a weak dollar environment.

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There are plenty of reasons why stocks should go up when the dollar drops. Since 40% of the S&P 500 earnings come from multinational operations abroad, a lower dollar means revenues from foreign currencies translate into higher earnings for U.S. companies, and higher earnings translate into higher stock prices. Just review the recent performance in Caterpillar ( CAT - news - people ) (61% sales outside U.S.), paint maker PPG (55% revenues outside U.S.) and McDonald's ( MCD - news - people ) (67% foreign revenues).

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Also, as the dollar falls, foreign investors especially see their buying power in the U.S. rise, making them more willing to bid for stocks and bonds.

Canadian energy, mining and financial stocks are jumping higher, and for U.S. investors, a declining dollar multiplies these gains. The iShares MSCI Canada Index (EWC) has doubled since March. Canada Report readers have done even better. Click here for all currently recommended stocks in the Canada Report.

Then, there's the so-called carry trade, which has been stimulated by the zero cost of borrowing dollars to invest in other assets.

"Since interest rates are zero, you can borrow dollars at no cost at all and use them around the globe," says Jeffrey Kleintop, chief market strategist of LPL Financial, a privately held brokerage firm based in Boston. "For example," explains Kleintop, you can borrow dollars at zero, and invest in Brazilian bonds yielding 5.2%. As the real (Brazil's currency) has risen 26% against the dollar so far in 2009, such a carry trade would have earned 31%, or double the loss of value in the dollar.

Gold and oil, especially, have an inverse relationship to the dollar, underscores Frank Holmes, CEO and chief investment officer of U.S. Global Investors ( GROW - news - people ), a mutual fund empire headquartered in San Antonio, Texas, that focuses on hard assets. "When gold is up, the dollar tends to be down, and vice versa," says Holmes. "Looking at weekly data going back 20 years, this relationship occurs nearly 70% of the time."

Holmes, manager of the U.S. Global Investors Gold and Precious Metals (USERX) fund, believes gold mining stocks are cheaper than bullion. "If the price of bullion goes up 10%, gold mining shares like Freeport McMoran, Anglo Gold and Newmont Mining ( NEM - news - people ) should rise by 20%."

For gold to rise to its former peak price of $850 in 1980, adjusted for inflation, it would have to double again to $2,300 an ounce, Holmes says. Holmes advises investors who want diversification among all commodities and foreign currencies to invest in Global Resources (PSPFX), a mutual fund his enterprise manages.

McCullough, of ResearchEdge, suggests buying iShares Brazil ( EWZ - news - people ), for the play on Brazilian commodities and iShares Taiwan ( EWT - news - people ), as a play on closer ties to mainland China. To play the dollar's slide, you could short the PowerShares DB U.S. Dollar Index Bullish ( UUP - news - people ), or buy puts on the exchange-traded fund.

How Interest Rates Play a Role in the Currency Markets

Interest rates play the foremost important role in moving the prices of currencies in the Forex market. As the institutions that set interest rates, central banks are therefore the most influential factors. Interest rates dictate flows of investment. Since the currencies are representations of a country’s economy, differences in interest rates affect the relative worth of currencies in relation to one another. When central banks change interest rates they cause the Forex market to experience movement and volatility. In the realm of Forex trading, accurate speculation of central banks’ actions can enhance the trader's chances for a successful trade.

An increase in interest rates encourages traders to invest within that market and causes the demand for the currency to rise. As demand rises, the currency becomes scarcer and consequently more valuable. Investors are drawn to the currency, causing it to appreciate, because they will gain a higher yield on their investments, as in the Jane example. In order to purchase the country's assets (stocks or bonds), Jane will have to convert her domestic currency to the target country's currency also increasing demand. Conversely, a fall in interest rates discourage investors from purchasing assets in that particular economy, as the return on their investment is now smaller. The economy's currency will depreciate as a result of the weaker demand.

E-Currency Trading guidelines

1. E-Currency Trading should ideally be started with an investment of a few hundred dollars. The system should be studied prior to investment and this takes time and research. A small initial investment enables you to build your account block-by-block.
2. E-currency or digital currency like Pay Pal that pays for pay per click advertising is like real money in the real world. When trading in E-currency, the same safety measures need to be applied like the ones you would in the real world.
3. Internet privacy spells internet safety, while availing of wireless internet access.
4. Since the Internet is accessible 24x7, the trading option could be used to start your own Internet business. If the system appeals to you and once the basics are understood, you could look at self-employment with a high speed internet connection.
5. It pays to plan investments and not jump into the fray all at once. Always begin any home based affiliate business in a small, humble way. The same applies to E-currency trade too. There are online resources that help you to understand from big players how much an investment is likely to grow.

Strategies that apply to E-currency trading

The rules applicable to E-currency trading are no different to those that apply to futures trading. The value of E-currency is determined, like in the case of other currencies, by the supply and demand. The investment could either be in currency that has the backing of history and performance or opt for ones that are being experimented with. Like in the stock market or forex market, in E-currency trading too, there is hope in a turn-around. Just like the other established markets, here too, the investor needs to chart every change that affects the online marketing services.

How does the surreal currency work?

E-currency trading takes place with the exchange of E-currency. There are hundreds of different e-currencies already in active use. Each currency represents the physical monetary evaluation of a currency or precious metal like a gold investment or in silver jewelry. The currency not only enables wireless payments towards purchases and sales made via Internet marketing, but also helps the owner of the E-currency to benefit when the currency is converted to hard cash. The owner profits from the exchange process via the fluctuation in the determining currency value. This is not much unlike the online currency trading that is commonly carried out via forex.

Understanding E-Currency trading

E-currency is Internet Money that allows the buying and selling of Internet goods and services through internet shopping. Being part of the larger design, the wireless money enables purchases at lightning speed from any of the ecommerce websites. The high level of security makes the purchase safer than those made with the use of credit cards or bank transfers. The E-currency trading gurus are rooted to the belief that the demand for e-currency will only grow with dedicated Internet Commerce. It is similar to the disbelief shown two decades ago in a system that would enable access to grocery shopping stores from home with the help of grocery coupons.