The Powerful Dollar is Creating Opportunity
The world is now immersed in higher inflation, geopolitical turmoil, rising interest rates and extreme volatility. This is a lot for investors to manage and plan around. An interesting consideration from all these events is the effect it is having on global currencies and, more importantly, the opportunity that this presents. A country’s currency and its interest rates typically move in unison, and in 2022 the U.S. dollar has appreciated significantly and rapidly. The U.S. Dollar Index, which measures the greenback against a basket of other currencies, is up nearly 20% so far this year. Yet we know that this won’t last forever; a weaker dollar is in our future and global markets will benefit from it.
So, what does this mean for you?
Large swings in valuations create opportunity through mispricing, and the window to gain from an opportunity can close quickly. There are a variety of quality investments that have been weakened by the unsustainably high dollar but will strengthen significantly when the dollar turns lower – therein lies the opportunity. The greenback has moved higher in step with rising interest rates, and as an important aside we see opportunity in locking into fixed-income yields that haven’t been this generous in over ten years. But focusing on the opportunity in equities, as the U.S. dollar weakens, international stocks will benefit from much stronger local currencies. American companies that generate a significant portion of their earnings from overseas sales will benefit in the same manner, as foreign revenue is converted to a cheaper U.S. currency. Additionally, U.S. exporters will gain market share as their products become more competitive in the global marketplace. Identifying diversified funds and individual equities that benefit from a weaker U.S. dollar has been a steady topic in our investment committee meetings, and we expect to bring our best ideas to you as they mature.
Portfolio repositioning is not the only way to take advantage of this currency imbalance. Foreign travel is cheaper than it has been in years. The Euro, used by 19 nations across Europe, is below 1-to-1 parity with the U.S. dollar, which is nearly 20% cheaper than it was one year ago. Hopefully you are reading this while traveling abroad, but if you’ve been delaying that trip to Europe, now is the time.
Regretfully, we don’t have a crystal ball, but we do know that the U.S. dollar will ultimately give back much of its recent gain over major foreign currencies. When it does, it will be a tailwind to much of the U.S. economy and will coincide with an easing of inflationary pressure. For now, our team will continue to look for, and act on, the opportunity that exists today.