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The dollar’s mark on international funds

Slowing global growth and mild U.S. economic expansion have combined for a stronger U.S. dollar and weaker results from international stocks. In a Money Talk Video, Marc Amateis explains the forces at work and how they affect long-term investors. Marc spoke with Joel Dresang. A transcript of the interview is below.

Joel Dresang: Marc, the stock market started out 2016 with a 10.5% correction, and then it reversed direction about the same time that the dollar started weakening. How do you explain that?

Marc Amateis: Well, I think one of the major reasons for that, Joel, was when the dollar weakened, that was a real plus for U.S. exporters. It made products that we ship overseas cheaper to those overseas countries, and that was a real boost for the stock market.

Joel: So what do we mean by a strong dollar?

Marc: A currency, the dollar or any other currency, is strong or weak in relation to other currencies. Typically, when you talk about the strength of the dollar, you’re talking about in terms of a basket of overseas currencies. So, a strong dollar means it takes more of those overseas currencies to buy a dollar.

Joel: So, it’s sort of a popularity contest.

Marc: Well, in a way. A strong currency means that a country’s economy is doing better typically than other economies around the world.

Joel: Marc, between 2013 and 2015, the U.S. dollar gained 24% against a basket of major currencies. What has that meant to the international stocks in my portfolio?

Marc: Well, as a U.S. investor, it means your international stocks didn’t do as well as your U.S. stocks. One of the reasons is because those overseas profits have to be turned into dollars, and with a strong dollar, you buy fewer dollars, so that affects the profits that you realize.

One of the other effects is that of commodities. Most commodities are priced in dollars, and if you have a foreign country who is a buyer of commodities, with a strong dollar, those commodities are going to be more expensive, and that affects the profitability of the companies in those countries.

Joel: So, the U.S. dollar weakened by 5% against that basket of major currencies in the first quarter. What was behind that?

Marc: I think really that was a reflection of the investment community deciding that the Federal Reserve was going to go real slow with their rate increases. You know, I think when we started the year, most economists expected the Federal Reserve to raise interest rates – raise the Fed funds rate – four times, a quarter point at a time.

That’s off the table. They’re talking now two, maybe one, maybe even no raises this year. So, that had the effect of weakening the dollar, because remember as a country raises their interest rate, it draws more money in, and that would tend to strengthen their currency.

Joel:  So, that suggests that this is a good time to stay in international stocks?

Marc: Well, I think you should always be in international stocks. You always want to maintain an exposure.

It gives you a diversified portfolio. It exposes you to growth globally that maybe we don’t have here in the U.S. It exposes you to countries that have a burgeoning middle class. So, all of those things tell us we want to stay long term with a reasonable exposure overseas markets.

I wouldn’t be too quick to either increase or decrease international exposure just on the basis of how the dollar is moving, because that can change, and over time you’ll find that it pretty much evens itself out.

Joel: Why wouldn’t you increase exposure at this time?

Marc: Well, we see the emerging markets still having a tough time, primarily based on what’s going on in China, with its slowing growth. A lot of the emerging markets are dependent heavily upon China. And we still see the U.S. as a better economy than a lot of the overseas countries right now.

So, there will be a time, and as things improve overseas I think you do want to start maybe taking small baby steps into, you know, some more exposure to some of these overseas markets. But I would be hesitant to just go and change your asset allocation structure simply based on how the dollar is moving shorter term.

Marc Amateis is vice president and an investment advisor at Landaas & Company.

Joel Dresang is vice president-communications at Landaas & Company.

Money Talk Video by Jason Scuglik and Peter May

Learn more

Dollar matters for investors, a Money Talk Video with Marc Amateis
The impact of the dollar, a Money Talk Video with Brian Kilb
International Investing, from the U.S. Securities and Exchange Commission
International investing includes risks, a Money Talk Video with Brian Kilb

(initially posted April 28, 2016)

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