For years, I have put the topic of currency movements in the "don't understand, won't understand" pile of information. But I have changed that. I have officially set up a folder on my computer labelled "currencies." It is still empty, but it's my first step in moving to at least "don't understand, can't understand."
For a long time, currencies have been fairly routine. After World War II, leaders got together and created the Bretton Woods accord. Part of the plan was to encourage world trade as a way of healing from the horrendous war that just occurred by encouraging world trade. World trade is extremely difficult when currencies are disruptive. By setting up mechanisms to smooth currency movements, world trade is encouraged. It seems to have worked fairly well, until recently.
Suddenly, dramatic declines in the Brazilian real (pronounced "hey - ow"), the Russian ruble and the Japanese yen have made investment analysis difficult. My Biggest Mistake of the Day (BMD) is that I lack any method for getting a general sense of the appropriate relationship between their currencies and my own. While it was clear to me that lowering interest rates and implementing Quantitative Easing (QE) policies weakened the US Dollar, I did not pay sufficient attention to the amount of weakening. At some extreme, the US Dollar is too "strong," meaning that distortions are too significant to be sustainable. The opposite is also true.
While precision is impossible, a general sense can be developed by looking at historical relationship and factors - something I have not done. Given that I have some investments with exposure to the aforementioned currencies, it seems important to start to fill up the "currencies" folder.
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