Profiting From a Weak U.S. Dollar

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The value of the dollar relative to other world currencies has been gradually weakening since 2020 after strong and steady gains through the late 2010s. Depreciation has accelerated as inflation has picked up, impacting both domestic and international investments.

A strong dollar reflects a robust U.S. economy, low Federal Reserve interest-rate increases, and tax policies that encourage companies to bring back profits from abroad. A weak dollar can signal an economic downturn, rising inflation, or both.

The impact of the rise or fall of the U.S. dollar on investments is multi-faceted. Investors should understand the effect that exchange rates can have on financial statements, how this relates to where goods are sold and produced, and the impact of raw material inflation.

The confluence of these factors can help investors determine where and how to allocate investment funds when the U.S. dollar is weak. Enlisting the help of a top-notch experienced broker can help if you’re new to forex trading.

Key Takeaways

  • The American currency is a global reserve currency used in international finance and trade.
  • A weaker dollar can be good for exporters, making their products relatively less expensive for buyers abroad.
  • Investors can also try to profit from a falling dollar by owning foreign-currency ETFs or investing in U.S. exporting companies.
  • A weaker dollar is often accompanied by higher inflation in the U.S. and/or an economic downturn.

Domestic Impact

The Financial Accounting Standards Board (FASB) is the governing body that mandates how companies account for business operations on financial statements in the U.S.

The FASB has determined that the primary currency in which each entity conducts its business is referred to as “functional currency.” The functional currency may differ from the reporting currency, . however. Translation adjustments may result in gains or losses in these cases which are generally included when calculating net income for that period.

The functional and reporting currency will be the U.S. dollar if you invest in a company that does the majority of its business in the United States and is domiciled in the United States. Its functional currency will be the euro if the company has a subsidiary in Europe. The dollar/euro exchange rate must therefore be used when the company translates the subsidiary’s results to the reporting currency (the U.S. dollar).

Let’s say that one euro buys $1.54 compared to a prior rate of $1.35 in a falling dollar environment. The company therefore benefits from this translation gain with higher net income as you translate the subsidiary’s results into the falling U.S. dollar environment.

Why Geography Matters

Understanding the accounting treatment for foreign subsidiaries is the first step in determining how to take advantage of currency movements. The next step is capturing the arbitrage between where goods are sold and where goods are made.

Low-cost provider countries have captured manufacturing dollars as the United States has moved toward becoming a service economy and away from being a manufacturing economy. U.S. companies took this to heart and began outsourcing much of their manufacturing and even some service jobs to low-cost provider countries to exploit cheaper costs and improve margins.

Low-cost provider countries produce goods cheaply during times of U.S. dollar strength. Companies sell these goods at higher prices to consumers abroad to make a sufficient margin.

It helps exporters when the dollar is weak. Expenditures are paid in U.S. dollars as those dollars fall but revenues are received in stronger currencies. Becoming an exporter is more beneficial to a U.S. company. U.S. companies took advantage of the depreciating U.S. dollar between 2005 and 2008 and U.S. exports showed strong growth, shrinking the U.S. current account deficit to just 2.744% of gross domestic product (GDP) in 2009.

Many of the low-cost provider countries produce goods that are unaffected by U.S. dollar movements, however. These countries peg their currencies to the dollar. They let their currencies fluctuate in tandem with the fluctuations of the U.S. dollar, preserving the relationship between the two. Costs decline in a falling U.S. dollar environment regardless of whether goods are produced in the United States or by a country that links its currency to the U.S.

Up, Up, and Away

The price of commodities related to the value of the dollar and interest rates tends to follow a cycle:

  1. Interest rates are cut –>
  2. Gold and commodity indexes bottom –>
  3. Bonds peak –>
  4. The dollar rises –>
  5. Interest rates peak –>
  6. Stocks bottom –>
  7. The cycle repeats –>

This cycle doesn’t persist at times, however. Commodity prices don’t bottom as interest rates fall and the U.S. dollar depreciates.

A good historical example of such a divergence occurred during 2007 and 2008 as the direct relationship between economic weakness and weak commodity prices reversed. The price of crude oil was up over 20%, the commodity index was up around 10%, the metals index was up almost 15%, the dollar depreciated around 4%, and global food prices increased sharply during the first five months of 2008.

The correlation between the euro/dollar exchange rate which was 1% from 1999 to 2004 rose to a striking 52% during the first half of 2008, according to Wall Street research by Jens Nordvig and Jeffrey Currie of Goldman Sachs.

Economists still disagree about the exact reasons for this divergence but there’s little doubt that taking advantage of the relationship provided investment opportunities.

Profiting From the Falling Dollar

Taking advantage of currency moves in the short term can be as simple as investing in the currency that you believe will show the greatest strength against the U.S. dollar during your investment timeframe. You can invest directly in the currency, currency baskets, or exchange-traded funds (ETFs).

Investing in the stock market indexes of countries that you believe will have appreciating currencies or investing in sovereign wealth funds can be a longer-term strategy and provide exposure to strengthening currencies. These are vehicles through which governments trade currencies.

You can also profit from a falling dollar by investing in foreign companies or U.S. companies that derive the majority of their revenues from outside the United States with costs in U.S. dollars or that are U.S. dollar-linked.

Buying assets in the United States, particularly tangible assets such as real estate, is extremely inexpensive for non-U.S. investors during periods of falling dollar values. Foreign currencies can buy more assets than the comparable U.S. dollar can buy in the United States so foreigners have a purchasing power advantage.

Investors can also profit from a falling U.S. dollar through the purchase of commodities or companies that support or participate in commodity exploration, production, or transportation.

What Is Raw Material Inflation?

Raw material inflation occurs when the commodities that companies use to manufacture and produce goods increase. The trickle-down effect is that these companies must then raise their prices to compensate.

What Is Reporting Currency?

Businesses use reporting currency in their financial statements. It’s typically the currency that’s used in its home country. This can present some conversion complications for multinational businesses that own subsidiaries in other countries.

What Is the Euro/Dollar Exchange Rate in 2024?

One U.S. dollar was equal to 0.918358 euro at midday on Oct. 15, 2024. The euro saw a slight increase from 0.903795 on Oct. 1.

The Bottom Line

Predicting the length of U.S. dollar depreciation is difficult because many factors collaborate to influence the value of the currency. Having insight into the influence that changes in currency values have on investments provides opportunities to benefit both in the short and long term, however. Investing in U.S. exporters, tangible assets, and appreciating currencies or stock markets provide the basis for profiting from the falling U.S. dollar.



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