A Japanese-Style Recession Could Be The Saving Grace For The US Dollar

The race to the bottom continues and the US Dollar is still in the lead in terms of losing purchasing power.

When the market commentators pronounced the Euro as “toast” earlier this year, we advised to be patient and not write the single currency off just yet.  The US Dollar has been in a similar predicament in recent months.

Expectations for further quantitative easing have pushed the US Dollar to all-time lows against the Swiss Franc, the Australian Dollar and the Singapore Dollar.  It is near historic lows against the Japanese Yen as well.  Just how much the US Dollar has been loosing value over the long-term is not all that clear to the general investing public.

A long-term chart showing the US$ versus Japanese Yen shows the significant decline of the greenback against the Japanese Yen since the early 70’s.


As much as this trend is alarming, there is a silver lining in all this.  Japan had near zero interest rates and deflationary pressures for two decades now.  Property prices have never recovered since the boom years of the 80s.  The Stock Market Index is barely 1/4 of it’s peak in 1990.  And yet, the Japanese currency has continued to make gains against the US Dollar.

It has also performed remarkably well against other currencies since the financial crisis.  Although this may seem somewhat counter-intuitive, despite near zero interest rates and essentially no return on Japanese denominated assets, the currency has remained strong.

If the US were to follow a similar fate as Japan, it would be a nightmare for property and equity prices.  But there may just be some hope for the US Dollar.  The pressure on the Dollar remains strong, particularly in view of the ever-mounting US debt burden.

But don’t write the greenback completely off just yet!

Good luck and good investing!

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