The impact of the dollar
Joel Dresang: Brian, the dollar is really strong against the euro. It’s appreciated 30% since last July. That’s quite a change in a short amount of time. Why has the dollar strengthened so abruptly?
Brian Kilb: A couple of things since dating back to the financial crisis, Joel. First of all, the U.S. economy has probably been in a little better shape than many others around the world. So if you’re looking for a safe haven, the U.S. has been a really good bet for that over the last few years. So foreign investors looking for safety, the U.S. Treasury is a very popular target for those investors.
I think the second part of it is that even though our interest rates seem relatively low historically, they’re still very attractive compared to other parts of the world. So the combination of both an attractive underlying economy, safe economy and attractive interest rates has been a magnet for foreign investors.
Joel: So, investors care about corporate earnings and interest rates. What has that strong dollar meant for corporate earnings?
Brian: Well, remember that there’s always two sides of the equation. So if currency is strengthening on one side it’s weakening on the other, right?
So, in a rising dollar environment better for importers, not quite as good for importers overseas. Better for exporters there.
The other thing to keep in mind is not just the business and the effect on corporate earnings, but what about the money that you make overseas, whether it’s a corporation or as an investment? When it gets repatriated back to the U.S. and translated back into U.S. dollars, it could either benefit or hinder your returns overall there as well.
As we always remind people, doing business overseas adds another layer of complexity. That means another layer of risk. So the volatility that you’ve seen over a short period of time in currency adds to the volatility you may find in investing overseas.
Joel: What about interest rates? So we’re expecting the Fed at some point to raise interest rates. What does the strong dollar do to that?
Brian: Well, to the degree that foreign investors continue to pour money into the U.S., it’s going to keep interest rates low. That’s going to help the Fed. To the degree there’s an external factor that provides some pressure to keep interest rates down, the Fed can allow itself some additional room to maneuver before the economy starts to heat up, inflation becomes an issue. There’s this other external pressure that’s going to help keep a lid on inflation and interest rates. That will help the Fed tremendously.
Joel: So considering what the strong dollar is doing for corporate earnings, both abroad and here in different ways, and what it’s doing for interest rates, what should investors be doing right now?
Brian: Well, I think the thing, as always Joel, is to keep a balanced approach to your investments.
Whether it’s the economy or markets, Wall Street hates uncertainty. Yeah, we’ve had quite a bit of movement in a short period of time, but it’ll end at some point in time. The challenges that the strength in the dollar have caused may dissipate to a great degree when the dollar starts to level off, right?
So our job as investors is to see these opportunities, to rebalance your portfolio in a manner that takes advantage of that change in circumstances, change in cycles.
Brian Kilb is executive vice president and chief operating officer of Landaas & Company.
Joel Dresang is vice president-communications at Landaas & Company.
Money Talk Video by Peter May
(initially posted May 22, 2015)
Landaas newsletter subscribers return to the newsletter via e-mail.