A strong U.S. dollar means now is a great time to travel abroad or to purchase foreign imports.
As the world’s safest and most stable currency, the U.S. dollar is benefitting from massive inflows of foreign investment.
One benefit of higher interest rates is that savers and retirees are finally getting a decent yield on fixed income. The world has taken notice.
You may have heard that the U.S. dollar and the Euro reached parity a month ago. That’s something we haven’t seen in over 20 years. Thanks to the Fed’s aggressive policy of raising rates to combat inflation, the U.S. Dollar Index is up nearly 20% against the Euro, pound, Canadian dollar, Yen, Yuan and other major currencies. The Fed’s action shows the world that the United States is serious about getting inflation under control and getting our economy back on track. Since the dollar is currently the world’s dominant currency, more people are buying the dollar and U.S. Treasurys. Many people overseas see the U.S. dollar and Treasurys as safe stores of value in these globally concerning times. The 4% yield on U.S. Treasurys compared to 1% in their home country, especially Europe, doesn’t hurt either. That in turn is pushing up the value (and purchasing power) of the U.S. dollar.
Thanks for sitting through my macroeconomics lecture. But you may be asking yourself: “What does a strong dollar actually mean for me and how can I benefit from it?”
3 Benefits of a Strong Dollar
Foreign goods and services are a lot less expensive. If you’ve been eyeing a foreign car, electronics or luxury goods, now may be the time to pull the trigger.
Better bargains domestically. As foreign goods become cheaper, American-produced goods that compete with their foreign equivalents have a lot of incentive to reduce their own costs. Not great for domestic manufacturers, but great for U.S. consumers.
How can investors take advantage of current climate? At Novi, we’re asset class investors. When one asset class is doing poorly relative to the other asset classes, we start selling holdings that are doing well (such as short-term bonds) and use that cash to buy asset classes that are underperforming, such as real estate, emerging market stocks and small companies in developed countries. Some of those areas are down 30% this year.
You may have heard that mega tech stocks (Apple, Facebook, Netflix, Microsoft, etc.) that rely heavily on overseas markets, are not great to hold when the U.S. dollar is strong. The rationale is that their products and services become more expensive to foreign consumers which cuts into sales. Also, a strong dollar cuts into income that companies earn abroad, since money brought in in the form of weaker foreign currencies is converted into fewer dollars back at home.
That being said, we don’t invest in tech companies as heavily as many other investment advisors do even during normal times. We know that over longer periods of time, the opposite side of the spectrum – smaller value companies -- will provide better returns.
Is the gap between the U.S. dollar and other currencies likely to continue?
Possibly. Keep in mind that currencies are subject to supply and demand, just like any other asset that’s traded. At some point, people will look to other foreign currencies and realize that there is an opportunity to purchase these currencies at a discount (knowing that the currencies and their respective countries will recover at some point).
Conclusion There are opportunities to thrive in every market climate. As the central bank of the U.S., the Federal Reserve’s job is not to prop up the stock market or keep bond yields high. Its purpose is to regulate banks, manage the country's money supply, and implement monetary policy. As the old expression goes: “Don’t fight the Fed.” But knowing how the Fed works, what its targets for inflation and unemployment are, and what drives its rate decisions can make you a more successful investor, saver and wealth builder. If you or someone close to you has concerns about your portfolio, asset allocation or cash flow situation in today’s uncertain times, don’t hesitate to reach out. We’ve helped many clients like you in similar situations.
RYAN A. DUNN, CFP®, is a Wealth Manager at Novi Wealth