China is the largest investor in dollars. It has hinted it will reduce its holdings if the U.S. continues to spend on the stimulus package, and increase its debt.(See China May Reduce Debt Purchases)
Many say the dollar won't collapse because- It is backed by the U.S. Government, making it the world's safe harbor currency.
- It is the universal medium of exchange, thanks to our sophisticated financial markets.
- All oil contracts must be in dollars.
Many in Congress want the dollar to decline because they believe it will help the U.S. economy. A weak dollar lowers the price of U.S. exports relative to foreign goods, making our products more competitive. In fact, the decline in the dollar improved the trade deficit in 2007. (See U.S. Trade Deficit - 2007)
Outcome
Although the dollar has declined dramatically over the last seven years, it has not yet created a collapse. It is not in the best interest of most countries to allow this to happen, since it would decrease the value of their dollar holdings.Regardless of the outcome, be prepared. Most experts agree that the best hedge against risk is with a well-diversified investment portfolio.
Ask your financial planner about including overseas funds. These are denominated in foreign currencies rise when the dollar falls. Focus on economies with strong domestic markets, such as Japan and Europe. Also ask about commodities funds, such as gold, silver and oil, which increase when the dollar declines.
