I’ve been getting a lot of questions on the dollar lately. Some readers are concerned about Russia’s threats to stop using U.S. dollars as its reserve currency. Others are eyeing the Yuan and wondering whether it can challenge the dollar’s dominance. And others still are wondering where the buck will stop with the country’s growing debt obligation. Whatever the reason, the million-dollar question from everyone is: How will the falling dollar affect my investments?
So today, let’s set the record straight and cover how a weak dollar affects Wall Street and the broader economy.
If you’re an American consumer, the weakening dollar has given you plenty of reasons to groan. From higher prices at the grocery store to rising prices at the pump, our wallets are taking a beating. But the consumer’s loss can be the savvy investor’s gain. You see, there is big money to be made from a low dollar if you know where to look.
On Wall Street
On Wall Street, a weaker dollar causes two major trends: The return of inflation and a currency tailwind in foreign markets.
Inflation: The primary driver behind inflation is commodity prices. Since 88% of the world’s commodities are priced in dollars, products like coal, crude oil, steel, gold and grain all become more expensive as the dollar weakens. This means that companies that produce or trade in these commodities see their bottom lines grow simply because they can ask for higher prices.
This is one of the reasons why we saw runaway gasoline prices a few years back—because a weak dollar helped inflate crude oil prices and resulted in windfall profits for energy companies. Of course, I don’t advocate buying commodities outright, and before you go buying any companies that deal in commodities I recommend you run them through Portfolio Grader and foremost.
Currency Tailwind: You don’t have to be a day trader trafficking in obscure currencies to take advantage of the favorable exchange rates created by a weak dollar. By investing in companies with an international footprint—meaning firms that are headquartered abroad or do most of their business outside the United States—you can profit handsomely from a weak dollar. Foreign business operations cost less and generate bigger profits in such an environment.
I call this trend a “currency tailwind.” In a nutshell, a currency tailwind is a favorable exchange rate against the dollar in foreign markets that boost sales and profits for stocks that do business there. This attracts foreign capital and makes it cheaper to operate in the market where that currency is used.
Where We Go From Here
So instead of worrying about the future of the greenback, this trend has me seeing green. For my advisory newsletters I’m focusing heavily on multinational plays in particular. And I don’t expect this trend to change course anytime soon.
After several rounds of Quantitative Easing and Operation Twist, it’s fair to say the Federal Reserve has sacrificed the dollar on the altar of monetary policy. The Fed’s policies have created a zero-interest rate environment that encourages spending and are bolstering recovery in the housing market, but they also keep the dollar depressed. And now that the Federal Reserve has pledged to keep the federal funds rate near zero for the foreseeable future, the dollar is on the decline for the long haul.