Why a strong dollar hurts investors

Over the past year, the dollar has been on the rise: The US Dollar Index, which measures the strength of the dollar against a basket of foreign currencies, is up 18%.

For tourists, a strong dollar is great news. It means you get more for your money abroad.

But for investors, a strengthening dollar is definitely bad news.

“When the dollar strengthens, that means foreign earnings will translate into fewer dollars. Those earnings will be lower,” says Sam Stovall, chief investment strategist at CFRA Research, adding that any foreign investments you own “will to hurt you in a rising dollar environment.

Here’s why investment experts say a strong dollar could hurt your portfolio and what you can do about it.

How a strong dollar hurts your portfolio

How to Adjust Your Portfolio for a Strong Dollar

As with any short-term development in the market, advisers advise against making massive changes to your portfolio or deviating from your long-term investment plans. But if you’re looking to take action now against the effects of a strengthening dollar, experts say you can make some adjustments to your portfolio.

Among your US equity holdings, shifting your allocation toward small- or mid-sized company stocks can reduce your exposure to multinational corporations for which the dollar represents the biggest drag.

You may also want to consider bolstering your holdings in sectors of the economy less likely to make profits abroad, says Rosenbluth. “Sectors like utilities and real estate tend to have most, if not all, of their revenue coming from the US, while healthcare and commodity companies are more multinational.”

As for your foreign holdings, you can buy funds that follow the “currency hedge” versions of international stock indices. The managers of these funds trade derivatives to remove the effects of currency fluctuations on the returns of the underlying stocks.

“It allows you to focus solely on the performance of the individual companies in the fund,” says Rosenbluth.

These funds will tend to lead their unhedged counterparts during periods of dollar strength and lag during periods of dollar weakness, but over extended periods, the performance you get from a hedged versus an unhedged product tends to be relatively similar. a 2020 analysis from Morningstar found.

A few other nuances separate hedged funds from unhedged ones, and the decision to keep either is ultimately a matter of preference, says Rosenbluth.

But don’t buy one or the other in an effort to time currency fluctuations for short-term gains, he warns: “You’re not as qualified as I am to project whether the dollar will continue to strengthen over the next 12 months.”

Register now: Get smarter about your money and your career with our weekly newsletter

Do not miss: Inflation is up 8.3% since last year, and more rate hikes from the Fed are likely to come

Leave a Comment