How to share in the dollar's surge

Better -- for a while

A rising dollar also puts a virtuous cycle into motion. A stronger dollar makes oil and other commodities cheaper for U.S. consumers and companies to buy. That provides a boost to U.S. consumer spending, because consumers have more money for things other than oil, and helps corporate earnings by driving down the cost of things such as fuel and raw materials.

That makes U.S. growth stronger and turns the U.S. stock market into a relative outperformer. That, in turn, attracts more overseas cash to dollar-denominated investments and sends the dollar even higher. (The 4% return on the S&P 500 from July 14 through Sept. 2 looks pretty good, for example, in comparison to the 17% loss recorded by the Brazilian stock market, as measured by the iShares MSCI Brazil (EWZ, news, msgs) exchange-traded fund.)

There's a limit to how far this virtuous cycle can go, though. A weak dollar increased U.S. exports as customers around the world found their strong currencies made U.S. goods and services cheaper. About half of the 3.3% increase in U.S. economic growth in the second quarter, for example, came from increased exports. U.S. exports grew 13.2% in the quarter, up from 5.1% in the first quarter of the year. A stronger dollar, however, makes U.S. exports more expensive and will take back part of the gains that resulted from a weaker dollar.

The economic consensus sees the second-quarter growth rate as the high point for the year. In the third quarter, economists are looking for growth at an annual rate of just 1.5%, as a stronger dollar eats into exports and consumer spending slumps because consumers have spent the full $100 billion in stimulus checks sent out from Washington. The very preliminary monthly numbers on consumer spending show this drop-off: Consumer spending, according to the Department of Commerce, climbed just 0.2% in July after rising 0.6% in June.

And it looks like some of the world, especially China, may be starting to pull the levers that will speed up growth. China's currency, the yuan, has stopped rising against the U.S. dollar. After gaining 6.6% against the dollar in the first half of 2008, making U.S. goods cheaper and Chinese goods more expensive, the yuan dropped 0.2% against the dollar in August. That's not enough to make Chinese goods markedly cheaper and to increase exports, but it is a startling change in direction that could signal the Beijing government's intention to accelerate growth.

A weakening of the yuan isn't the only sign that China might be trying to speed up its economy again. The government has raised loan quotas for bank loans to small and medium-sized businesses and increased tax rebates for exports in important categories such as textiles. The government is also increasing spending on infrastructure this year -- tripling spending on railroad construction, for example. And the government is increasing its pro-growth rhetoric with key officials pushing a goal of creating 9 million new jobs a year. China needs that many new jobs to absorb rural workers moving to the cities and to employ the country's huge annual production of college graduates.

Global bargain hunting

China isn't the only large developing economy giving off signals that it is aiming at higher growth. The new head of India's central bank isn't an insider who could have been expected to continue the bank's tough anti-inflation stance, which has lowered economic growth below 8%. Instead, he's a top official from the pro-growth finance ministry. The finance ministry has been increasingly critical of the central bank's policy as the ruling Congress Party heads into tough elections in 2009. The bank's new man, Duvvuri Subbarao, certainly knows the finance ministry's position by heart.

And finally, a stronger dollar gradually creates bargains in the rest of the world. For example, Australia's dollar has fallen to a year low against the U.S. dollar on strength in that currency and as the tumble in commodity prices hit the country's commodity-based economy. That downward pressure isn't about to end tomorrow, but at some not-too-distant point a weaker Australian currency and a stronger U.S. dollar will set international investors on an Australian buying spree. That will reverse the current flow, which has been sending cash out of Australian and into U.S. assets.

These trends will gradually put the brakes on the U.S. dollar. How fast depends on how and when the next act in the U.S. financial crisis that started in the subprime-mortgage market plays out. The next big problem could come in the option-rate-mortgage market, where $96 billion in loans issued from 2004 to 2007 are due to reset at higher rates in the next two years.

Continued: Commercial-real-estate market

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