Dow Hits New Intra-day High -- Or Did It?

Earlier today, the Dow reached a new intra-day high of 14,021. But if you were an investor from Europe, then it might not feel like a new high.

Why? Because the value of the dollar has declined relative to other currencies. On January 14, 2000, the world was jubilant when the Dow closed at an all time high of 11,722.98. An American who held onto his stocks through the recession, and sold yesterday at the intra-day high would have been rewarded by a 20% return on his investment.

A European who did the same would find he actually lost 12%. That is because he would have to convert his dollar holdings into euros. A dollar was worth .99 euros in March 2000, but only .72 euros now.

Look at this this way. A fund that exactly matched the Dow in March of 2000 was worth 11,722.98 in U.S. dollars, and 11,575 euros. At the intra-day peak on July 17, that fund was worth 14,021 U.S. dollars, but (thanks to the dollar decline) only 10,148 euros.

Source: Barron's, Is the Dow's Recovery a Mere Illusion?, April 17, 2007.

What It Means to You

Since the dollar has been declining, foreign investors may prefer their own stock markets to the U.S. markets. Over time this could decrease the value of the U.S. stock market. This could then decrease the value of U.S. corporations, since their managers are ultimately judged by the value of their stock prices.

Make sure you have a well-diversified portfolio that includes European and other international mutual funds. That way, you can benefit from not only the rising value of the global economy, but also the rising value of international currencies.

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