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David Purdy
Guest Columnist
Tune into CNBC and it seems
that every day the dollar inches further down against global
currencies. While the “dollar is falling” refrain hasn’t quite reached
the hysterical pitch of Chicken Little’s “the sky is falling,” you may
be wondering how a drop in the dollar impacts you -- and whether it
will have far-reaching economic and political ramifications.
As
is generally the case with anything that happens in the financial
markets, the impact of the dollar’s decline depends on your spending
habits and how you invest. Obviously, if you travel overseas or buy
imported products, the falling U.S. dollar will affect you to a greater
degree.
The most obvious result of a falling dollar is that if
you take your dollars to a bank and ask for euros or yen, you’ll get
less today than you would have several years ago. For Americans
traveling to Europe or Japan, or even to Canada and Australia, today’s
dollar doesn’t buy as much of the local currency. That makes everything
from food and hotels to taxi rides more expensive. Conversely, when
tourists from Paris or Tokyo arrive in New York City, the exchange rate
makes them feel flush with money.
And when everything seems
pleasantly inexpensive to foreign travelers, that’s good news for U.S.
hotels, resorts, and other businesses that cater to tourists. In
another plus for the domestic tourism industry, as the price tag for a
European vacation increases, Americans may decide to head for domestic
destinations rather than Paris and Rome.
However, the
implications of a declining dollar reach further than tourism. In the
big picture, from a corporate standpoint, if an American business wants
to buy a European company, it’ll have to shell out more dollars to make
the acquisition. The reverse is also true; today, many American
companies look like bargains to would-be buyers abroad.
At the
consumer level, you might expect that if you buy imported goods from
automobiles to mineral water, a declining dollar would mean your
purchases would cost you more. While the prices of imported goods
should rise as the value of the U.S. dollar declines, often a gradual
decline of the dollar is not factored into these prices as a line item.
Because
the United States is such a large and valuable consumer market, many
foreign companies actually absorb some of the dollar’s downward
fluctuations by reducing their profit margins. Simply, they feel like
dramatic price increases could result in loss of their market share. If
the dollar’s decline is severe or long-lasting, these companies would
be left with no alternative other than a price increase that could
cause American consumers to buy more American products.
On the
positive side, a weak American dollar is good for American companies,
from mom and pop operations to multinationals, which sell a lot of
their products abroad. Because American exports are cheaper for the
rest of the world to snap up, the American companies gain a competitive
edge.
When increased international sales revenues are converted
to U.S. dollars, the favorable exchange rate further inflates company
profits. Accordingly, if you are looking for investment prospects in a
period of continued decline in the dollar’s value, an attractive option
might be U.S. companies that are committed to increasing their business
abroad as higher sales abroad can lead to higher corporate earnings and
fuel overall growth.
In the wake of the Fed’s September half a
point drop in interest rates and speculation that another cut is being
considered, it’s important to note that lower interest rates
themselves, although intended to ward off a recession, can weaken a
currency as short-term investors transfer funds to countries where
their deposits and fixed-income investments bring higher returns.
While
the dollar’s decline will continue to grab headlines, large scale
portfolio changes are rarely advisable. If you try to anticipate, and
respond to, the market’s reaction to a falling dollar and rising
interest rates, you could end up making many unnecessary transactions.
And those costs have a direct impact on your portfolio.
Like the
equity markets (remember this summer’s comeback?), currency rebounds
can be quick and unexpected so it’s never wise to try to time the
market. While currency fluctuations may cause you to question your
international investments, remember that fluctuations generally even
out over time. The primary reason to devote a portion of your portfolio
to overseas investments is not to benefit from currency fluctuations,
but to diversify to reduce overall investment risk and benefit from
opportunity abroad.
Bottom line? An all-weather portfolio
diversified among a wide range of domestic and international stocks,
along with bonds and cash, can help you reduce the impact of
unpredictable economic forces, like the decline of the dollar, on your
portfolio..
Dave Purdy is president of Wealth Management Midwest, Forest Lake.
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