The dollar has fallen by an eighth against a basket of currencies since its high point in March. How will a weakening dollar affect your investments? The last point of comparison was in 2017. Why is the dollar falling? Will the current trend continue? And, how should you position your investment portfolio to account for a weakening dollar?
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Why Is the Dollar Falling?
The dollar is a safe haven currency for people all over the world. When times are difficult, investment tends to flow into the USA and strengthen the dollar. Now that vaccines are expected to help stop the pandemic global optimism is on the rise and this strengthens investment options other than the USA.
In addition, the US Federal Reserve has promised to go “all in” on keeping interest rates low, buying bonds, and printing money to keep credit flowing and the economy from going into free fall. The prospect of interest rates being low for the long term weakens the dollar. And, the Biden administration will most-likely push for more financial support across the board and for low interest rates into the long term future. Investors looking for high returns will end up looking to Europe or Asia for investment opportunities.
Will the Weakening of the Dollar Continue?
A hallmark of the Trump administration has been the trade war with China and high tariffs. This has tended to strengthen the dollar. Because Biden is more likely to rely on other means of dealing with China, consumers will be paying less for imported products, global growth will be positive and the dollar will continue to fall.
As we have frequently noted, a weak dollar is not a bad thing for American industry and tends to support exports. Thus the dollar will fall until it hits a level where it helps American industry and then it will stabilize. Meanwhile the price of oil will be cheaper in foreign currencies as will other commodities that are routinely denominated in dollars.
Because not all nations prefer a surge in their currency versus the dollar we can expect central banks to take action, which will modify the picture.
Because the pandemic is the root cause for effects on the global economy and currencies, we can expect all of this to continue for months as the disease worsens in the winter months, vaccines take months to be administered in sufficient quantity and people are convinced to abide by common sense precautions to drive down the incidence of Covid-19.
How Should You Invest with a Weakening Dollar?
The US economy is going to worsen before getting better. The longer Congress waits before passing more broad-based stimulus measures the worse it will be. To avoid having your investments hurt by a weakening dollar look offshore. You can purchase ETFs that track offshore stocks or bonds. You can increase your investments in US multinationals that have huge offshore footprints. And, you can move savings into foreign currencies or purchase commodities that will benefit from a falling dollar. For most folks, US multinationals or ETFs in the USA that track foreign stocks are easier to invest in and get out of and don’t require you to learn Forex or commodity trading!