The US dollar is not having a good summer. Down about 9% from its March highs, the greenback looks set to have its worst month in nearly a decade.
Sure, that could be bad if you were thinking about booking a vacation abroad, but it could actually be good for your investment portfolio.
First, why is the dollar weakening? The currency was strong for a while, then the pandemic hit and the Fed cut short-term interest rates to near zero. Low interest rates in the United States tend to weaken demand for US dollars as large investors move money overseas to chase higher-yielding assets denominated in foreign currencies.
The dollar successfully bucked this trend in March. Second, investors were willing to ignore lower interest rates in exchange for the perceived safety of the dollar as global fluctuating stock and bond markets amid economic panic over coronavirus lockdowns.
Since then, the market has calmed down, but US interest rates remain at historic lows. Over the past few weeks, this dynamic has begun to weigh heavily on the value of the dollar.
What a weak dollar means for US stocks
Now let’s get to that good news that we promised. A weaker dollar means that American products are cheaper abroad, which gives American companies that sell abroad more competitive prices. (A simple example: if you produce something in the US and sell it for $1, when you go to the UK it might now be selling for 95 cents. Why wouldn’t someone buy- it not at this price?) And you probably have the companies that will benefit already in your portfolio — in 2018, the percentage of S&P 500 sales coming from foreign countries was 43%, according to S&P Global.
Of course, this will affect some businesses more than others. According to Howard Silverblatt, senior index analyst at S&P Dow Jones Indices, technology companies could benefit the most because they have large international exposure, while utilities and some traditional telecommunications companies (like AT&T and Verizon) could benefit from this. benefit the least because of US-focused companies. .
And because of the pandemic, it’s not so much a question of How many something costs, but also or You can have it. As Asia opens up and produces more, for example, the American multinationals that supplement the investment portfolios of many Americans might be able to acquire the supplies they need overseas while others small businesses may have a harder time restocking, Silverblatt adds.
What a weak dollar means for foreign stocks
Also, a weak dollar can boost your foreign investments, says John Stoltzfus, chief investment strategist at Oppenheimer Asset Management. When a stock goes up in local currency or pays a dividend, that investment gain ultimately translates into dollars for US investors. The weaker the U.S. dollar, the more those same local currency gains will buy dollars in your investment account, Stoltzfus says.
For example, the MSCI EAFE Index, a widely followed benchmark for developed market equities, gained 7.9% in local currencies in the past three months through Tuesday. These gains amount to 13% when converted into dollars.
The outlook for the dollar
So where does the dollar go from here? It seems that much will depend on the ability of the United States to control the spread of the coronavirus. If the virus begins to spread widely and there is a need for longer lockdowns, we could see the dollar rise further as investors flee risky assets in favor of safety, says Jon Burckett-St. Laurent, Senior Portfolio Manager at Exencial Wealth Advisors.
But the Fed said he plans to keep interest rates low, and it looks like more government stimulus is coming. An increase in the amount of money the government “prints” could contribute to worsening US dollar weakness, he adds.