Most people generally do not pay much attention to currency moves. Unless someone is traveling overseas, or has a business that involves importing or exporting of goods, the value of the dollar does not garner much interest. However, as consumers the value of the dollar does impact the price we pay for goods.
There are several factors that can influence one’s currency. Countries that have high inflation, such as Argentina, generally will have a depreciating currency. Where inflation rates are similar, such as between the U.S. and Europe, the direction of interest rates impacts currency moves. With interest rates declining in Europe, and likely to rise here, the dollar has strengthened.
In recent decades global trade has increased significantly. This means the effect of goods being traded has a larger impact on our economy than previously. Oftentimes a product, such as an automobile, which is manufactured in the U.S. may have a significant amount of parts that are sourced overseas.
Commodities are goods that are significantly impacted by currency moves. Commodities include items, such as grains, metals, and oil. When the value of the dollar rises, the price of commodities tends to fall, which has been the case this year. However, for counties where their currency is weakening, such as in Europe, the price of commodities would tend to rise in their local currency.
The declining price of gasoline is the most obvious example of the benefits of a stronger dollar. A decline in the price of metals would impact the price of jewelry. A decline in copper prices helps lower building costs. A decrease in the price of grains only has a modest impact on the price of bread or cereal, since those raw material costs tend to be quite small relative to the price of the final product.
Besides commodities many other goods that are manufactured overseas will tend to be priced lower when the price of the dollar is stronger. For example foreign competition has allowed the price of cars to be lower in our country because of this added competition.
Services are one area of the economy where a stronger dollar would have little impact on prices. Education and health care would be primary examples. The cost of housing would only be impacted in a minor way from currency moves. The cost of building materials would tend to drop, but in Southern California land is the primary factor in the cost of housing, which is not impacted by the dollar.
The effect on businesses is somewhat mixed by a stronger dollar. Retailers and auto dealers would tend to benefit, as their costs would be coming down, and also consumer demand increases with lower prices. Those manufacturers that sell to foreign countries would tend to be hurt, unless they have plants overseas.
For an investor the impact of a stronger dollar is somewhat mixed. The U.S. economy does tend to benefit from lower prices plus investment dollars tend to flow where the currency is stronger. For a U.S. investor a stronger dollar does lower the value of one’s overseas investments.
In recent years Japan and much of Europe have been experiencing stagnant growth. A weaker currency in those countries may help to stimulate their economies along with their respective stock markets. Therefore, an American investor would be hurt by the currency translation, but might benefit from a stronger stock market in those countries.
During this year investors have done better with U.S. stocks versus foreign ones. If the bulk of the currency move has already occurred, then foreign investments may start to perform relatively better. Realize though that trying to predict shortterm currency moves is extremely difficult.
For a long term investor I believe it is still appropriate to have a portion of one’s assets invested in foreign securities. There will be some years that strategy helps performance, and other years like this one, where it does not. However, with foreign markets relatively cheaper versus the U.S., I would maintain a portion of investments overseas.
Allen Wisniewski has been involved in finance for more than two decades. He lives in Culver City with his family.