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That trip to Paris you took a few years back was fun, except for the sticker shock you experienced after checking your credit-card statements back home. Like many Americans traveling abroad a few years ago, you were dismayed to discover that a strong euro made paying for all those souvenirs, wine bottles, and buttery croissants seem a lot more expensive.

But, as any experienced traveler knows, foreign-exchange rates can work in reverse. When the dollar is strong and the euro is weak, it’s the American tourists enjoying the bargains while French visitors are paying more for their Statue of Liberty souvenirs.

 

What Happened?

Americans often first encounter the strength or weakness of the dollar when traveling internationally. The factors involved in how a dollar grows stronger or weaker can vary. However, the one constant is that the dollar follows a cyclical pattern of rising and falling. This cycle impacts you a lot more than how much that café stop at the Louvre cost.

 

What a Strong Dollar Means

When the Federal Reserve (Fed) takes action to send interest rates up, the dollar’s value usually strengthens. It can buy more of another currency than it could previously. As the Fed continues to normalize rates, the dollar will likely continue to strengthen.

A strengthening dollar can help fight inflation since it can help slow down a US economy that may be growing too fast while goods produced abroad coming into the US end up costing less for domestic consumers. A stronger dollar may also cut the cost of your next trip outside the US. In addition, foreign investors in US bonds will earn higher yields when the greenback is strong, increasing demand for US debt and helping lower overall yields in the US.

 

The strengthening dollar can also help fight against inflation since it helps naturally slow down a US economy that may be growing too fast.

 

A strong dollar is a positive for companies that do most of their business in the US, but ultimately bad for large-cap multinational companies. This is because American goods become more expensive for buyers overseas—which, in turn, makes non-imported products more appealing in foreign nations. So, companies must be disciplined in their business practices to stay competitive because they won’t win on price.

 

What a Weak Dollar Means

When the Fed lowers interest rates, the value of the US dollar declines because investing in US bonds is less attractive. American goods, in turn, become cheaper abroad. US companies that export most of their products prefer a weakened dollar because it helps make their products more affordable to buyers overseas. It often leads to lower unemployment numbers here in the US as production ramps up.

A weak dollar could also present tailwinds for global investment in emerging-market countries with external US debt (e.g., Latin America, Eastern Europe, Africa, the Middle East, and Asia). The loans they’ve taken in US dollars become less expensive for them to repay.

Countries that export commodities (e.g., nations in South America and Africa) typically see a boost, too. The dollar is the pricing benchmark for most raw material and agricultural products. Since the 2008 Global Financial Crisis, there’s been a strong inverse relationship between commodities and the US dollar. However, geopolitical tensions and other factors have occasionally weakened this relationship.

However, a weak dollar also has downsides. Imported goods used to manufacture products in the US become more expensive. Travel outside of the US, including your next trip to France, may be more expensive, as well.

 

A Strong Dollar Benefits... A Weak Dollar Benefits...
US tourists traveling abroad Big multinational US companies
Investors in US fixed income US employment
Domestic- and foreign-based companies that sell mostly to US-based consumers Emerging markets with US dollar-denominated debt
US buyers of foreign products Commodities-exporting countries
Non-US investors in US capital markets US investors in foreign markets

 

Weighing What To Do

The implications of a strong or weak dollar can be far more lasting than forking out a little less or a little more for a bottle of Champagne while on vacation. A financial professional can help sort out what impact the strength of the dollar may have on your investment portfolio. With this in mind, they can help you pivot to opportunities and possibly steer you away from the pitfalls.

 

To learn more about positioning your portfolio for currency swings, please talk to your financial professional.

 

Important Risks: Investing involves risk, including the possible loss of principal. Fixed income security risks include credit, liquidity, call, duration, and interest-rate risk. As interest rates rise, bond prices generally fall. •  Foreign investments may be more volatile and less liquid than US investments and are subject to the risk of currency fluctuations and adverse political, economic and regulatory developments. These risks may be greater, and include additional risks, for investments in emerging markets.

 

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