What a Strong Dollar Means for You and the Economy
Among all the ebb and flow of financial news, what is important and what isn’t? Definitely important: the dollar’s rise. This doesn’t easily lend itself to TV visuals, but it should have a big impact on investors.
Over the past 12 months, the greenback has climbed around 7%, versus a basket of other currencies. The U.S. dollar is at a four-and-a-half year high versus the euro, moving from $1.39 per euro in May to $1.26 lately, as economic weakness again grips Europe. That means your U.S. currency buys you more of European money, a boon for American travelers. The buck is up against the Japanese yen, the Canadian and Australian dollars, the Brazilian real – you name it.
Years of living and working in a manufacturing region help me learn to look for signals rather than noise. A signal refers to something that creates an impact beyond what would normally occur. Noise is just a blip that signifies no real significance. The possibility of an Ebola epidemic in the U.S. is noise – the chances of that occurring are very low. What’s happening on the currency exchange front is a big deal, a signal of an important trend.
Having a strong dollar is a plus for national pride but a mixed blessing otherwise. Some 40% of the Standard & Poor’s 500 revenue comes from overseas. For our trading partners, a higher dollar means our goods cost more, which is a competitive disadvantage. Multinational Procter & Gamble (PG), for instance, says it lost $1.1 billion in earnings during its recently completed fiscal year, due to the lofty dollar.
Oil, which is traded in dollars, last year became more expensive for overseas consumers, and that helped lower demand for it and thus reduced its price lately. That is not good news for energy company investors. Cost per barrel fell from $114 in June to about $84 today. (Limping economies abroad and an oil glut are contributing influences.)
Americans buy things that are made here and sometimes we buy things made in other countries. Sometimes items from China, for instance, seem very cheap relative to what a U.S.-made item might cost. The Chinese yuan is one exception to the strong-dollar story: This year, China’s currency has weakened against the buck, thus its exports to us remain cheap.
That aside, on our shores, a strong dollar has the beneficial effect of holding down inflation. One big reason is that imports are cheaper.
Other factors may contribute to the price difference but a big part of price variance is the currency exchange rate. This holds true for consumer as well as business purchases.
When we make items here and ship them abroad, we are exporting our goods for foreign consumers to buy. When our dollar goes up in value, foreign currencies fall in relative value so things seem more expensive. Foreign consumers buy less and our U.S.-based company registers lower sales and profits.
On the other hand, if U.S.-based companies purchase foreign made products by importing, or if American consumers buy foreign-made products, prices become cheaper. This becomes a simple equation to a degree. If the dollar is strong relative to other currencies, then buyers look for companies that import. If the dollar is weak relative to other currencies, then buyers look for those companies in our country that export.
As an investor, your job is to search through your portfolio and understand what you own and why. As you look at valuations, part of the job is to discern news stories that are truly just noise and to maintain discipline. When the news is truly a signal that something meaningful has occurred, you must pay attention and be ready to take action.
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Joseph “Big Joe” Clark, CFP, is the managing partner of the Financial Enhancement Group LLC, an SEC Registered Investment Advisory firm in Indiana. He teaches financial planning at Purdue University and is the host of Consider This with Big Joe Clark, found on WQME and iTunes. He is a Registered Principal offering Securities and Registered Investment Advisory Services through World Equity Group, Inc, member FINRA/SIPC. Big Joe can be reached at firstname.lastname@example.org, or (765) 640-1524. Follow him on Twitter at @Big Joe Clark and on Facebook at http://www.facebook.com/FinancialEnhancementGroup.
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