On October 22, 2009, the U.S. dollar fell to a 14-month low against the euro, hitting $1.5046, the weakest since August 2008, according to our research.
What—if anything—should investors do?
Is the falling dollar a problem?
While the dollar’s fall has captured the attention of economists, its effect on Americans may come down to a mix of negatives and positives.
Certainly, when the dollar declines in value against other currencies, imports (such as foreign cars) become more expensive. That’s because U.S. importers, who buy goods in a foreign currency that’s rising relative to the dollar, have to pay more than they did previously. The prices of certain domestic goods and services can also rise, because companies that buy raw materials from abroad have to pay more for those materials and may raise prices on their end products to offset that increase.
On the positive side, however, a falling dollar makes U.S. exports less expensive. That’s because American exporters sell their goods in foreign countries and are paid in a foreign currency that is now rising relative to the U.S. dollar. They can charge less for their goods and still make a profit, or charge the same and earn more. As a result, American companies who export goods can be more competitive against foreign counterparts—they can export more and grow their global market share.
That, in turn, is good for Americans in a number of ways. When American exports grow their market share, they need to hire more employees, and that reduces the unemployment rate (which stood at 9.8% in September of 2009, according to the Department of Labor). A lower unemployment rate puts more money in Americans’ pockets, which leads them to spend more—and because consumer spending makes up 70 percent of U.S. gross domestic product, that causes the U.S. economy to grow.
Because a falling dollar can have such a varying affect, economists argue about how much of a concern it is in and of itself. In fact, a declining dollar is more of a problem when other economic problems exist, such as inflation. A good example is the 1980s, when the financial markets, which were concerned about the prospect of inflation resulting from the dollar’s decline, collapsed. Today, inflation is less of a concern.
In fact, today the greatest problem the falling dollar may present is that if it stays low, overseas investors may be reluctant to purchase dollar-denominated assets, such as bonds. That’s because the returns from their investments are coming in less-useful dollars. This could lead to financing problems for American companies or even the federal government, which sells bonds to raise capital.
Investment options for a falling dollar
Although the falling dollar need not worry most Americans, if you’re an investor who wants to profit from the situation, there are a number of options you might consider.
Currencies: Investing in the currency you believe will show the greatest strength against the dollar is the most direct way to profit from a falling dollar. Trading currencies requires investment knowledge and experience the average investor does not possess—but you can utilize this strategy by investing in currency-focused exchange-traded funds (ETFs). For example, some of the money managers we utilize might purchase FXE if they believe the euro will appreciate against the greenback, CEW for a basket of emerging market currencies, or DBV for a basket of currencies from the G-10 nations.
Commodities (including gold): The traditional wisdom, when faced with a falling dollar, is to invest in commodities, which are hard assets that tend to hold their value. Such a commodity—gold—historically has been considered a “safe haven” in times of currency devaluation. You can purchase commodity- and gold-related securities through mutual funds, or you can purchase gold in the form of bouillon. Wentworth, Hauser & Violich is a money manager we have been pleased with in the past because of their positions in basic materials and energy.
Large-cap stocks: Large companies are more likely than small companies to generate substantial revenues overseas—which means they have non-dollar-denominated assets. All of those euros, shekels and rupees will convert into a greater number of dollars, in turn putting more profit in U.S. shareholders’ pockets. Additionally, many large companies have entire departments dedicated to managing currency fluctuations. WrapManager uses several money managers that have solid large-cap equity portfolios, such as Estabrook Capital Management, Neuberger Berman LLC, and NWQ Investment Management LLC.
Foreign stocks and bonds: When the dollar falls, stocks and bonds priced in foreign currencies tend to rise in value. Diversifying your portfolio into foreign stocks and bonds, then, may help buffer your portfolio against a drop in the dollar. (The exception is if the foreign stocks and bonds are in a mutual fund whose holdings are hedged back into the dollar. But that’s a complicated topic for another column.) Wentworth, Hauser & Violich, Brandes Investment Partners, Tradewinds NWQ Global Investors LLC are three money managers that have foreign stock portfolios you may want to consider.
Investing options for a rising dollar
One question you might ask, however, is whether you want to invest now to profit from the falling dollar—or invest now to profit from the rising dollar?
The economy has picked up, making it possible that the “bust” part of “boom-and-bust” cycle is fading, in which case the Federal Reserve Board could raise interest rates, possibly leading the dollar to increase in value. You can make a good argument that the dollar is likely to rise from this point forward.
In that case, you might consider investing for a strong dollar. Contact your WrapManager Wealth Strategist at (800) 541-7774 or email for more information.
Finally, a word of wisdom: Over the course of time, currencies fluctuate, often with little effect on investments. In fact, since the 1950s, South Africa has had one of the world’s weakest currencies and one of the world’s best-performing stock markets. The lesson to be learned: The dollar may be falling, but that doesn’t mean the sky is.
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