Dollar weakens on BOJ report -- Review your hedges

November 8, 2006

On Tuesday, November 7th, the dollar fell to 117.44 yen after the Bank of Japan (BOJ) announced it is still considering an interest rate rise before the end of this year. The weakness in the dollar also caused the Euro to rise to $1.28 and gold futures contracts to $631.20 as global investors sought to hedge their dollar assets.

What It Means:
Demand in the U.S. has been declining as a result of a general slowing in the economy. However, continued growth in emerging markets is offsetting this decline, so that the International Monetary Fund's forecast for global growth over the next two year is a robust 5% annual rate.

Thanks to this growth in emerging markets, Japanese businesses surveyed in the September Tankan reported that demand for Japanese exports continues to exceed supply. This means the Japanese economy will continue to accelerate, creating a need for the BOJ to raise interest rates. Higher rates in Japan will create more demand for the yen and less for the dollar -- hence, a weakening dollar.

Action Steps:
One of the best ways to hedge against a potential dollar decline is to have assets in non-dollar denominated mutual funds, such as Euro-Pacific funds. Check with your financial planner to find a good one. Other suggestions are in the World Money Watch Special Report on the declining dollar.

Source: IMF, World Economic Outlook, Bank of Japan web site