By Patrick Swesey
For the Bellingham Business Journal
A “strong dollar” sounds like a good thing. And, in some ways, it may be. But what does it mean to you as an investor?
Before you can answer this question, you need to be familiar with what the phrase “strong dollar” really means. The worth of the U.S. dollar can’t really be assessed in isolation. Instead, the dollar’s value is determined by its constantly changing strength relative to other currencies.
And right now the U.S. dollar is flexing its muscles. In fact, earlier this year, the dollar hit a 12-year high versus the euro, and it’s also strong against almost every other major currency in the world. The Canadian dollar, which many investors in northwest Washington watch closely, has fallen 17 percent against the dollar over the last year. And with weak oil prices dampening economic activity in the Canadian oil sands sector, the loonie continues to face headwinds. Although the pace of its decline is likely to slow.
Meanwhile, a number of factors seem to be driving the strength of the dollar. First of all, the U.S. economy has been relatively robust, making the U.S. a more appealing destination for foreign capital. Also, we’ve reduced imports thanks in part to the boom in U.S. energy production and subsequent drop in oil prices. We’ve also increased exports since the recession due to the rebound in the global economy.
This smaller trade gap has helped shore up the dollar. And even though interest rates in the U.S. are quite low by historical standards, they are still higher than those being paid in Europe and Japan. These higher rates have made U.S. bonds more attractive to foreign investors, consequently increasing the attractiveness of the dollar.
In some aspects of your own life, you may also find the strong dollar to be beneficial. As a consumer, then, you may well appreciate the strong dollar. For one thing, you might see a drop in the prices of some imported items, such as clothing, electronics and automobiles. And if you are planning to travel to the eurozone (those countries within the European Union that use the euro as their common currency), you will find that your dollar will go farther than it did a year or more ago. In the summer of 2014, your dollar would have converted to about .75 of a euro, but now, that same dollar would fetch you almost one full euro. In other words, you can buy more euros — and more goods and services priced in euros — because the dollar is stronger.
But, in getting back to the original question above, how might the dollar’s strength affect you as an investor? In this case, you may find a strong dollar to be somewhat of a mixed bag, with different outlooks for different types of investments.
For one thing, just as foreign goods are cheaper for you, U.S. goods are now more expensive for Europeans, causing them to buy fewer of our products, which is not good news for U.S. companies with a global presence — of which there are many. By that measure, you might think that the strong dollar will eventually drag down the stock market — but that hasn’t always been the case. At various times, the financial markets have done quite well, even with a strong dollar. As imports become cheaper, U.S. consumers have more money in their pockets, and when they spend this extra money on U.S. goods, it can help the bottom line of U.S. businesses, and perhaps counteract some of the effects of weaker sales abroad.
Furthermore, in contrast to its impact on U.S. companies, a strong dollar can help foreign companies compete, and may give them an earnings boost from their U.S. sales. The stronger dollar also makes foreign investments “cheaper” for you. Even more importantly, though, by taking advantage of the stronger dollar and investing an appropriate amount internationally, you can help diversify your holdings — and proper diversification is essential to investment success.
Ultimately, you’ll want to be aware of the dollar’s strength, and you shouldn’t be surprised if it affects some of your holdings. Nonetheless, don’t overreact to the dollar’s movements. Currency exchange rates fluctuate rapidly and it’s impossible to predict how long the dollar will remain strong, so you’re better off by not speculating on the dollar’s future. By owning a diversified mix of quality investments, including some international investments, and by following a long-term strategy that’s suitable for your risk tolerance, goals, and time horizon, you can build your own “strength” as an investor — no matter what’s happening with the dollar.
Patrick Swesey is a financial advisor and branch director of RBC Wealth Management’s Bellingham branch at 3101 Newmarket St. #101. RBC Wealth Management is a division of RBC Capital Markets.