Dollar matters for investors
Joel Dresang: Marc, the dollar recently reached an 11-year high against the euro, and it’s also very high against the yen. Let’s talk about what this means to investors. Let’s start by asking what it means when we’re talking about a strong dollar.
Marc Amateis: A currency is strong or weak versus another currency. Maybe you’ve experienced it when you’re traveling, for example. If you travel to Europe and the dollar is strong, your dollar goes farther because it buys more euros.
On the other hand, maybe you travel to Mexico, and the Mexican peso is strengthening versus the dollar, so your dollar doesn’t go as far in Mexico.
Joel: What’s behind this recent rise in the dollar?
Marc: The strengthening of a currency might be compared to a popularity contest, if you will. If a country’s economy is growing, if it’s strong, if there’s very low political turmoil, if interest rates are expected to rise.
We’ve been doing pretty well in this country versus most of the other countries around the globe. So, as a result, money flows into the U.S., looks for investment here, is interested in purchasing dollars through, for example, buying U.S. Treasury bonds. So all that will lead to a strengthening of the U.S. dollar.
Joel: So as a bondholder, for U.S. bonds, does that help my holdings?
Marc: It does. Sure. Because anytime there’s a demand for something, the price tends to go up. So, if you’re a holder of U.S. Treasurys, and there’s more demand for U.S. Treasurys because overseas investors are wanting to buy U.S. Treasurys, that’ll make the value – everything else being equal – of Treasury bonds that you hold go up in value.
Joel: What about stocks?
Marc: Yes. It can have an effect, for sure. It depends on the company and the type of business they’re in. For example, if you’re a U.S. company, and you’re exporting overseas, you could get crimped a little bit because a strong dollar makes your products more expensive to overseas buyers.
On the other hand, if you’re a company shipping to the United States, for example, and your currency is weak versus the dollar, it makes your product less expensive to American importers.
Joel: So it would also then keep the cost of imports low in the U.S. if the U.S. dollar is strong relative to other currencies. Does that mean that it’s going to be keeping inflation lower too, then?
Marc: It can certainly have an effect on that. That’s right. Because we’re a net importing country. Anytime the dollar is strong, it tends to reduce the price of imports. That reduces the cost to consumers, helps to keep inflation low.
Joel: And with low inflation, the Fed would be less inclined to hurry up and raise interest rates.
Marc: Right. If the dollar is strong and helping to keep inflation tapped down, that’s one less reason that the Fed has to raise interest rates.
Joel: So what should investors do with all this, the fact that the dollar is stronger right now versus the euro and the yen?
Marc: I think, again, it all boils down to a properly balanced, well-allocated portfolio. It’s really hard to try to determine currency moves. What you want is a portfolio with a reasonable allocation to overseas stocks – somewhere in the order of 15 percent.
And currency valuations are going to affect the valuations of those overseas holdings, but over time, that’s going to get smoothed out by the normal, natural progression of currencies vis-à-vis one another.
Marc Amateis is a vice president and investment advisor at Landaas & Company.
Money Talk Video by Peter May
(initially posted Jan. 27, 2015)