BY ROB SNELL
Currently, the U.S. dollar is pumped-up and
powerful. But what does a strong dollar mean
to you, as an investor?
To begin with, it’s important to understand
just what is meant by a “strong” dollar. The U.S.
dollar does not exist in a vacuum — its value,
from a global perspective, is determined by
its changing strength relative to that of other
currencies. Let’s look at an example: Suppose
that, in 2011, you traveled to Europe and wanted
to trade in one dollar for its equivalent value
in euros.
At that time, your dollar would have converted
to about .75 of a euro. Fast forward to
early 2015; if you returned to Europe now, your
dollar would fetch you almost one full euro. In
other words, you can buy more euros because
the dollar is “stronger.”
In fact, earlier this year, the euro hit a 12-year
low versus the dollar. And it isn’t just the euro;
the dollar is strong against almost every other
major currency in the world. What has led to
this strength? It’s not always easy to determine
what’s behind foreign exchange rates — which
can fluctuate even more than the stock market
— but the recent surge in the dollar seems to
be due, at least in part, to its obvious connection
to the American economy, which has been
growing faster than many other economies
around the world.
The stronger dollar is also due to expectations
that interest rates will remain higher in
the U.S. than in many other countries.
But whatever the reasons for it, the dollar’s
strength may be having an impact on your
investments. A strengthening dollar typically
lowers returns from international investments
because you get fewer dollars in exchange for
the value in euros or other foreign currencies.
And some U.S. companies with a global presence
may face challenges due to lower earnings
from their international operations.
These results might lead you to think that a
strong dollar would be bad news for the stock
market, but that hasn’t been the case in the
past. At different times, the markets have
performed well with both a strong and a weak
dollar.
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. Also, the stronger dollar
can help make foreign investments “cheaper.”
Even more importantly, by taking advantage of
the stronger dollar and investing an appropriate
amount internationally, gaining exposure
to different economies and markets, you can
help diversify your holdings, which is important.
Although diversification can’t guarantee a profit
or always protect against loss, it can help reduce
the impact of volatility on your portfolio. Be
aware, though, that international investing carries
special risks beyond currency fluctuations,
including political and economic instability.
The strong dollar may have attracted your
attention, but don’t be distracted by it — and
don’t overreact. Currency exchange rates can
fluctuate rapidly, and no one can predict how
long a strong dollar environment will last. By
sticking with a solid, long-term investment
strategy, you can help keep up the “strength”
of your own dollars.
Snell is a financial advisor with Edward Jones
Financial in Saratoga Springs.
Photo Courtesy Edward Jones Financial