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How Cheap Is the Dollar Really?

Wednesday, 13 Apr 2011 | 2:42 PM ET
CNBC.com

You know the dollar is weak. Really weak. But wait until you check out this analysis:

The basket of currencies that provide the basis for the widely used DXY dollar index is comprehensive, but the mix reflects trade balances from the 1980s - "where most of the world trade crossed the North Atlantic, where Emerging Markets were troubled by serial crises and headlines were dominated by the cold war," wrote Thomas Stolper, chief currency strategist in London for Goldman Sachs, in a research note.

It makes more sense, Stolper said, to measure the dollar against a broad trade-weighted index that is adjusted for inflation. Goldman has one, and so does the Fed. Both indices give greater weight to developing countries that have become more important U.S. trading partners - and whose currencies have been on a roll.

And, Stolper said, they "show consistently that the broad traded weighted Dollar is at historical record lows – clearly weaker than at the previous record lows in early 2008."

Is this a buying opportunity? Not yet, according to Stolper. The deficit and a dovish Fed will probably continue to drag on the currency. But if Fed policy shifts, or international funds start moving into U.S. equities, or job creation picks up in the tradable sector, things could change. Watch closely.

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