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Economic Landscape
Because global financial imbalances are the greatest in history—as evidenced by the U.S. current account (trade) deficit—and we expect consistent fiscal and monetary policies, we do not foresee a change in the structural issues that have contributed to the weakening dollar. We cannot predict with certainty that the dollar will in fact decline; however, we present an overview of economic forces to allow you to assess whether a basket of currencies is a valuable diversification element in your portfolio with an objective that seeks to protect against a further decline in the dollar.
In explaining the fall of the U.S. dollar, we focus on the current account deficit as the biggest single factor. The current account deficit is the difference between what Americans earn from other countries (exports, services, investments abroad) and what we pay out to other countries (imports, services, loans). This shortfall - the combined balance on trade in goods and services, income, and net unilateral current transfers - between the U.S. and the rest of the world amounted $738.6 billion in 2007.* As a share of gross domestic product (GDP), the deficit amounted for 5.3% in 2007. Foreigners must absorb this shortfall by buying about $2 billion worth of U.S. dollar denominated assets every single day, just to keep the dollar from falling.
We often hear about the trade deficit, which is simply exports minus imports. Visualize the U.S. buying Chinese goods and paying for them with U.S. dollars. The Chinese must decide what to do with the dollars they receive: as they do not find enough American goods and services to consume, they can decide to purchase U.S. dollar denominated assets, such as U.S. Treasuries; or they could convert them to their own currency, which would cause the U.S. dollar to fall.
(Source: Bureau of Economic Analysis news release March 17, 2008.)
Another big weight on the dollar is the large U.S. budget deficit. It is not clear how the U.S. will pay for its long term obligations, including Social Security, Medicare and Medicaid. While the budget deficit is a long-term concern, the current account deficit must be financed every single day.
The Merk Hard Currency and Asian Currency Funds are a pure play on currencies that provide investors with a new fundamental investment option. To gain access to a basket of currencies without the Fund, investors must either determine which currencies they wish to invest in and gain exposure through buying those currencies directly; invest in funds that include more speculative currencies in their portfolios, taking on more currency risk; invest in international stock or bond funds that introduce stock market, credit and interest risks; or engage in complex and speculative derivative trading.
*Source: Bureau of Economic Analysis news release March 17, 2008.
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