Home Learning What Does a Stronger Dollar Mean for You and Me?

Greenbacks are on the rise as of autumn 2014 thanks to a blossoming faith in the US economy. What does a stronger dollar mean to you? Are there any investment moves you can make to take advantage of this trend?

To be on top of your portfolio make sure you know what is going on with the dollar. Here are some tips for navigating the US currency crest.

What Is Up With the Dollar?

Before thinking about making any financial moves consider why the value is going up. How long will this trend last? Is it worth adjusting your portfolio?

The dollar has been getting stronger because:

• The US economy is improving, not magnificently but enough (4.2 percent growth in the last quarter)
• American monetary policy changes are considered to be a sign that things are improving, especially in comparison to economic moves in Europe and Japan (The Fed’s bond buying program is tapering and it is expected to raise interest rates sometime in 2015 or early 2016. Europe and Japan are still trying to stimulate their economies, China is slowing down)
• Investors are purchasing dollars to ride the wave of potential future growth

The word on the street is that this trend should be around for a while. Why? According to Chris Matthews at Fortune Magazine. it is because the US economy is likely to continue improving faster than other economies. Economists at Capital Economics, a leading macroeconomic research company, put the euro at $1.15 by 2016 says CNNMoney. Right now the exchange rate is hovering around $1.27 for one euro.

This doesn’t mean the dollar will definitely keep getting stronger. Who knows what will shake the global economy in the months and years to come? It does mean that presently (October 2014) there are enough factors in place to indicate that the trend could continue.

Making any moves really depends on how active you are as an investor. If you like to keep your eye on market trends to jump on stock buying opportunities or if you are looking for a unique portfolio balancing tool, then you could use the greenback trend to your advantage. If you are happy with your investments as they are, then use this trend as a learning opportunity. Keep your eye on how the rising dollar impacts global markets, domestic markets, and your portfolio.

What Does a Stronger Dollar Mean for the US Stock Market?

The stock market and the value of the dollar generally share an inverse relationship – one goes up, the other tends to go down. This isn’t a hard rule. There are a couple key factors that go into this general relationship:

• US exports become more expensive. US companies that rely heavily on exporting goods tend to lose their competitive edge, which can bring stock prices down. Cotton, steel, electronics, cars, and pharmaceuticals are all major US exports. American companies that deal with these exported goods may see a downturn.
• US companies that earn foreign currencies for their services abroad take home less of a profit when those earnings are converted into dollars.

What does this mean for you, the savvy investor? When looking at what stocks to pick, consider the potential drop of US companies that are heavy exporters or that do a lot of business abroad. Companies that are big importers or those that really revolve around the American economy may be good picks. That includes multinationals and foreign companies that sell to the US, think Walmart, Volkswagen, and Bank of America.

Bullish Dollar ETF’s

Aside from considering the impact of a stronger dollar when buying or selling stocks, what else can you do to hopefully take advantage of this trend? Putting a small wedge of your portfolio into an exchange traded fund that looks to the US dollar for gains is an option.

There is of course risk with this choice, but if you believe in the continued strength of the greenback and if you would like a nice little alternative investment to round out your portfolio, then consider something like the Power Shares DB US Dollar Index Bullish Fund (UUP) or the Wisdom Tree Bloomberg US Dollar Bullish Fund (USDU).

You don’t have to be an amazing Forex trader to benefit from a blossoming currency trend. Keep an eye on the exchange rate, and the news. Consider where the value of the dollar is headed in relation to other currencies when you make your stock investing decisions. If your faith in the greenback is strong because of your own assessment of the global markets and you would like an alternative investment in your portfolio, bullish dollar ETF’s are an interesting option to look into.

Looking deeper…

There are plenty of great (and not so great) books on forex trading if you are interested in stepping into currency markets. Read at least two before you start – currencies are incredibly volatile and risky! Before you get into the tips and techniques, try James Rickards ’Currency Wars: The Making of the Next Global Crisis . Its great for a fascinating look at world markets and currency trading.

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