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The dollar is still very weak

Since the end of April, just before the Eurozone sovereign debt crisis started heating up, the dollar has risen against other major currencies by about 10% (see top chart above). A stronger dollar is always good news, in my opinion, since the strength of the dollar is a significant part of our standard of living and reflects importantly on the overall health and viability of our economy. But most of the dollar's gains this year have come at the expense of the confidence-weakened euro, and that's hardly a ringing endorsement of the dollar. As the second chart above shows, the real value of the dollar (adjusted for relative inflation differentials) is still very low from an historical perspective; by my estimates, the dollar today is only about 7.5% above its recent all-time low against a large basket of currencies.

Measuring the value of the dollar against other commodities is certainly a useful exercise, but it also helps to know how the dollar is faring against things (e.g., gold, commodities, energy, real estate). On that score the dollar also is not doing very well. As the first two charts above show, the dollar has lost considerable ground against gold, commodities and oil, though it recently has recovered a portion of what it lost in the past 10 years. Relative to real estate (third chart), the dollar has done much better, only losing a fraction of its value against home prices, and hardly any of its value against commercial real estate prices. The fourth chart shows the real price of gold, which is still shy of the peak it briefly reached in early 1980.

Overall, the dollar looks pretty weak, with the notable exception of real property. That suggests that if you're looking for some way to hedge against a further decline of the dollar's value, buying real estate (and possibly leveraging it with a record-low fixed rate mortgage) might be the best candidate.

Selling the dollar against other currencies is a risky proposition, given that it is close to its all-time lows, and as the second chart at the top suggests, there is likely to be some support at these levels. The chart above suggests that the dollar is very undervalued relative to the Aussie dollar, and that is a reflection of how important commodity prices—which are close to record highs against the dollar—are to the Australian economy. If commodities were to weaken further, the Aussie dollar would probably follow suit.

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