How the Strong Dollar Affects Investments
by Chris L. Meacham CPA, Cornerstone Wealth Management
The US. dollar has been steadily on the rise lately, reaching 4-year highs as it continues to gain value against foreign currencies. As an example, Barclays predicts that the value of the euro will drop to $1.10 sometime this year, as compared to its $1.35 value last July. The reason the dollar is so strong right now is not necessarily a result of what’s going on with our economy, but is more due to the struggling economies in the rest of the world. And while historically, the fluctuation of the dollar has not drastically affected the stock market, it is a good idea to be conscious of what dangers might come if the dollar continues to strengthen and also to be aware of what great opportunities might be in front of you.
Taking the biggest hit are the large, global companies based here in the U.S. Converting their foreign profits back into US dollars is resulting in declining profits. For example, 3M said recently that the strong dollar will result in a reduction of total sales in 2015. Converting foreign sales back to dollars is like selling their products at a discount. Coca-Cola, McDonalds and Philip Morris are among other multinational companies that are expected to suffer from missed earnings estimates.
In fact, any U.S. based company that relies heavily on exports is being affected. The strong dollar makes their goods and services more expensive compared to foreign competitors, and overseas consumers will undoubtedly respond to the price difference. Therefore, companies where a majority of the business occurs outside the U.S. will likely see reduced returns.
Other markets that will be negatively affected are commodities, the energy sector, and technology. In general, a strong dollar is bad for commodities, like oil and steel for example, because it makes them more expensive. Energy and materials companies, like Chevron and Sonoco (which does consumer packaging) will feel the affects of more costly commodities. And just as with the forecasts for energy-based companies, technology stocks have also seen lowered expectations as both industries are focused internationally. Lastly, emerging markets is another area that will take a hit with the current economic climate as they rely heavily on commodities and are most often heavily tied to the dollar.
As one might expect, much of the opportunities to be found with the strengthening dollar come in direct contrast to where the declines are seen. In other words, while companies doing a majority of business overseas will see reduced returns, domestic companies that do business here in the states will benefit from the strong dollar and the renewed purchasing power that can be found with local consumers. Stateside, consumers are finding savings at the gas pump, with international travel, and with cheaper imports.
Other sectors that should benefit are utilities and healthcare. Both industries have historically done well when the dollar was strong.
Lastly, some experts say that the biggest opportunities lie in Europe. While there is some risk involved, a strong dollar and weaker euro may help stabilize prices. Additionally, while we discussed how the strong dollar hurts American exports, the opposite is then true in Europe. A weaker currency there helps their exports to America, benefiting European countries that do much of their business in the U.S.
All in all, it’s best to avoid overreacting to the strength or weakness of the dollar and to put all your eggs in one basket. But you may want to be aware of how the currency movement is going to affect different markets. As always, you should speak to your financial advisor to discuss the details of your situation before making any drastic portfolio changes.