Strong Dollar Is a Double-Edged Sword

What does a strong U.S. dollar mean for you? We commonly think of strong as a positive thing, but we’re talking finance and economics here, where nothing is ever simple and straightforward. A strong dollar is in fact a double-edged sword, and it’s extremely difficult to predict which edge is the more likely to cut you.

Right now, the dollar is dandy.

The U.S. dollar has gained more than 15 percent against the yen, the euro and the Canadian dollar in the past six months, and in fact climbed to its highest point in 11 years. With that news, the patriot in most of us may now be cheering, “Way to go, greenback!” The U.S. is winning, but in a backhanded-compliment kind of way: The dollar is gaining strength not so much because of stellar U.S. economic performance — though it is steadily improving and U.S. corporations are doing quite well — but because of the disappointing economic performance in the rest of world. Our growing energy independence is probably strengthening the dollar, too, reducing our current account deficit and thereby, at least theoretically, shrinking the global supply of dollars and upping the dollar’s value. And thanks to the improving health of our economy, the Federal Reserve has telegraphed that it will raise interest rates, which will encourage more fixed-income investment and further bolster the dollar. Whatever the reasons, we’ll take any good news we can get.

For consumers, a strong dollar is unequivocally good.

As a consumer, the strong dollar is not just good news, it’s fantastic news. Everything you and I purchase that’s imported becomes cheaper, whether it’s clothing, television sets, oil or gold, putting more money in our pockets and driving down inflation. If you’re traveling outside the U.S., your dollar goes further as well, making lodging, transportation and sightseeing — not to mention that Italian leather handbag, silver quaich from Scotland or Thai Sangkhalok pottery — a bargain by comparison.

For investors, it gets more complicated.

As an investor, the strong dollar becomes much more of a mixed bag. It makes U.S. exports more expensive in relation to foreign-made goods, thereby weakening demand, and U.S. companies with overseas revenue streams will see the value of those profits diminished. How does that impact investors? In general, it means that under a strong dollar a portfolio with a high exposure to U.S. equities may do better than one with a high exposure to international equities, but those U.S. equities that do a lot of business abroad may see reduced returns. To use a very concrete example, Proctor & Gamble — a U.S. corporation but also the world’s largest consumer goods company with billions of dollars in annual overseas sales — just this Tuesday reported that their quarterly earnings were down by 31 percent. The culprit, according to P&G? The U.S. dollar, and they warned investors that the burgeoning buck would cut sales by 5 percent and profits by 12 percent this year.

Don’t fixate on fluctuations.

All that said, it’s exceedingly difficult to “time the market” of rising or falling currencies, and most individual investors should avoid trying. Investing for most of us is a long-term game and it can be counter-productive to play it based on short-term trends. My advice to investors is threefold. First, it’s good for the average investor to have a basic understanding of factors such as currency appreciation and depreciation that impact the markets, because it makes you a more savvy and confident investor. Second, consult with your financial adviser about how you might judiciously modify your portfolio in the prevailing market conditions — timing the market isn’t easy, but it’s not impossible with the help of smart, experienced professionals. Third, and above all, stay focused on the fundamental merits of individual investments and your portfolio allocation over time rather than fixating on market fluctuations such as the dollar’s strength. Taking the long view, the dollar’s current value becomes merely a detail — a detail that’s up for now but will most certainly go down again eventually.

Phoebe Venable, chartered financial analyst, is President & COO of CapWealth Advisors LLC. Her column on women, families and building wealth appears each Saturday in The Tennessean.