The US dollar continues to strengthen against other major currencies. The dollar index has increased over 18%+ this year, its highest level since the early 2000s.
Due to its status as the world’s currency, its effect is globally felt when the US dollar rises or drops. Investors are also primary recipients of the impact of these rallies.
Is the rising dollar value good or bad news for investors? How does a stronger US dollar impact investment portfolios? We examine these points in this article below.
How does the high dollar value impact US investors?
A stronger currency implies a drop in the inflation rate. Importation becomes cheaper, and the cost of consumer products reduces. Luxury imported products cost less. Travelers and tourists also benefit from the rising dollar.
The general impact on citizens and consumers is primarily positive. But what about businesses and investors? Stocks are inversely correlated to the dollar. The value of stocks falls as the US dollar strengthens. A rising dollar means lower returns on stocks and bonds for the American investor.
American companies in overseas markets also suffer adverse effects from a stronger dollar. Their products’ prices shoot up due to this increased exchange rate, lowering the demand. As a result, they stand the risk of consumers abandoning them for competitors with cheaper alternatives. For this reason, a few American multinationals have reduced their revenue expectations due to the exchange rates effects. Examples of such companies are Coca-Cola, Procter and Gamble, and Microsoft.
Emerging markets are also at the receiving end of the negative impacts of the rising dollar. Such markets issue bonds in dollar denomination. They risk defaulting on these debts due to higher exchange rates.
Additionally, American export companies are also at a disadvantage. Exportation costs rise as the dollar strengthens. As a result, American products have become more expensive, lowering their demand. The consequence is a decline in exportation, which could result in job loss for some.
How does the high dollar value impact, non-US investors?
As the dollar strengthens, US global companies earn less profit. The result is a decline in their stocks. Non-US investors who hold US companies’ stocks suffer losses in the form of lower yields or worse.
However, businesses that export products to the US benefit from the rising dollar. This is because they earn more revenue once they convert the dollar back to their local currencies. As a result, such companies’ stocks might remain relatively stable or rise in value during these times.
Emerging countries are on the receiving end of the adverse effects of a stronger dollar. These countries take international loans in dollars. Paying back means converting their currencies to the dollar. The higher exchange rate puts a strain on repayment.
How to reduce the rising dollar impact on your investment portfolio
The current market condition is not permanent. According to experts, it is unwise to make a drastic change to your investment portfolios because of it. However, making a few adjustments may benefit you in the short term, if not in the long run.
Some sectors of the US economy remain unaffected, at the very least, by the dollar rallies. A few may even earn some profits as a result. Real estate and utilities are among these sectors that may benefit from the situation. As a result, investors can look toward diversifying in these areas. Moving some of your investments to smaller companies’ stocks may reduce your exposure.
As the dollar strengthens, hedging is a great way to avert the negative impact on your portfolio. But this is only effective if you’re a short-term investor. As mentioned, the current conditions are impermanent. Experts believe that the dollar will even out sooner or later. Therefore, long-term investors can sit tight and ignore the current market movements.
According to one expert, an excellent hedging asset at this time is unpopular ETFs that track international markets. However, investing in emerging markets now might be a bad idea. Other markets, such as Japan or Europe, can be a great tool. Currency index funds are also a great bet, according to experts.
Investors can also diversify their portfolios to include ETFs that trade only currencies like the Japanese yen or Euro.
Will the dollar continue to rise?
Experts expect the dollar to continue strengthening as long as Federal Reserve continues to hike the interest rate. As a result, many believe the dollar will continue to rise for a while.
The federal reserve’s primary goal is to bring inflation under control. But this is still a long way off in this battle.
A factor that could slow the dollar’s rally is Europe’s central bank monetary policies. If Europe’s interest rate catches up with the Federal Reserve’s, this could raise the euro value, slowing down the dollar’s bullish run.
However, experts do not see this happening soon. The ECB has been slow in raising the interest rate. For this reason, investors are shifting to the dollar for greater yields. Demand for the dollar is at a 20-year all-time high. And this could remain so for a long time.
The Russia/Ukraine war has also significantly impacted Europe’s economy negatively. Another factor that caused investors to seek the dollar against other major currencies is its “safe haven” status.
The current market trend will change at some point. The market fluctuates. Currencies and other assets rise and decline. These cycles are unpredictable. These impact investment according to the portfolios and investors’ risk management strategies. Successful investors find ways to protect their investments and benefit from every market condition. A wealth management expert comes in handy at such as time as this. They can recommend the best investment strategies to hedge your investments and capitalize on the current market conditions.