Profiting From a Weak U.S. Dollar (2024)

After strong and steady gains through the late 2010s, the value of the dollar relative to other world currencies has been gradually weakening since 2020. The depreciation accelerated into 2022 as inflation has picked up, impacting both domestic and international investments. When the dollar is strong, it reflects a robustU.S. economy, low Federal Reserve interest-rate increases, and tax policies that encourage companies to bring backprofits from abroad. On the other hand, a weak dollar can signal an economic downturn, rising inflation, or both.

The impact of the rise or fall of the U.S. dollar on investments is multi-faceted. Most notably, investors need to understand the effect that exchange rates can have on financial statements, how this relates to where goods are sold and produced,and the impact of raw material inflation.

The confluence of these factors can help investors determine where and how to allocate investment funds. Read on to learn how to invest when the U.S. dollar is weak.

Key Takeaways

  • A strong dollar is generally a policy goal of the United States, with the American currency a global reserve currency used in international finance and trade.
  • A weaker dollar, however, can be good for exporters, making their products relatively less expensive for buyers abroad.
  • Investors can also try to profit from a falling dollar by owning foreign-currency ETFs or investing in U.S. exporting companies.
  • A weaker dollar is often accompanied by higher inflation in the U.S. and/or an economic downturn.

Domestic Impact

In the U.S., the Financial Accounting Standards Board (FASB) is the governing body that mandates how companies account for business operations on financial statements. The FASB has determined that the primary currency in which each entity conducts its business is referred to as "functional currency." However, the functional currency may differ from the reporting currency. In these cases, translation adjustments may result in gains or losses, which are generally included when calculating net income for that period.

What are the implications of these adjustmentswhen investing in the United Statesin a falling dollar environment? If you invest in a company that does the majority of its business in the United Statesand is domiciled in the United States, the functional and reporting currency will be the U.S. dollar. If the company has a subsidiary in Europe, its functional currency will be the euro. So, when the company translates the subsidiary's results to the reporting currency (the U.S. dollar), the dollar/euro exchange rate must be used. For example, in a falling dollar environment, one euro buys $1.54 compared to a prior rate of $1.35. Therefore, as you translate the subsidiary's results into the falling U.S. dollar environment, the company benefits from this translation gain with higher net income.

Why Geography Matters

Understanding the accounting treatment for foreign subsidiaries is the first step to determining how to take advantage of currency movements. The next step is capturing the arbitrage between where goods are sold and where goods are made. As the United Stateshas moved toward becoming a service economy and away from a manufacturing economy, low-cost provider countries have captured those manufacturing dollars. U.S. companies took this to heart and beganoutsourcing much of their manufacturing and even some service jobs to low-cost provider countries to exploit cheaper costs and improve margins. During times of U.S. dollar strength, low-cost provider countries produce goods cheaply; companies sell these goods at higher prices to consumers abroad to make a sufficient margin.

But when the dollar is weak, it helps exporters. As the U.S. dollar falls, expenditures are paid in U.S. dollars but revenues are received in stronger currencies—in other words, becoming an exporter—is more beneficial to a U.S. company. Between 2005 and 2008, for example, U.S. companies took advantage of the depreciating U.S. dollar and U.S. exports showed strong growth, shrinking the U.S. current account deficit to just 2.744% of gross domestic product (GDP) in 2009.

However, many of the low-cost provider countries produce goods that are unaffected by U.S. dollar movements because these countries pegtheir currencies to the dollar. In other words, they let their currencies fluctuate in tandem with the fluctuations of the U.S. dollar,preserving the relationship between the two. Regardless of whether goods are produced in the United Statesor by a country that links its currency to the United States, in a falling U.S. dollar environment, costs decline.

Up, Up, and Away

The price of commodities related to the value of the dollar and interest rates tends to follow the following cycle:

  1. Interest rates are cut -->
  2. the gold and commodity indexesbottom-->
  3. bonds peak -->
  4. the dollar rises -->
  5. interest rates peak -->
  6. stocks bottom -->
  7. the cycle repeats -->

At times, however, this cycle does not persist, and commodity prices do not bottom as interest rates fall, and the U.S. dollar depreciates

A good historical example of such a divergence from this cycle occurred during 2007 and 2008as the direct relationship between economic weakness and weak commodity prices reversed. During the first five months of 2008, the price of crude oil was up over 20%, the commodity index was up around 10%, the metals index was up almost 15%, the dollar depreciated around 4%, and global food prices increased sharply. According to Wall Street research by Jens Nordvig and Jeffrey Currie of Goldman Sachs, the correlation between the euro/dollar exchange rate, which was 1% from 1999 to 2004, rose to a striking 52% during the first half of 2008.

While economists still disagree about the exact reasons for this divergence, there is little doubt that taking advantage of the relationship provided investment opportunities.

Profiting From the Falling Dollar

Taking advantage of currency moves in the short term can be as simple as investing in the currency you believe will show the greatest strength against the U.S. dollar during your investment timeframe. You can invest directly in the currency, currency baskets, or exchange-traded funds (ETFs).

For a longer-term strategy, investing in the stock market indexes of countries you believe will have appreciating currencies or investing in sovereign wealth funds, which are vehicles through which governments trade currencies, can provide exposure to strengthening currencies.

You can also profit from a falling dollar by investing in foreign companies or U.S. companies that derive the majority of their revenues from outside the United States(and of even greater benefit, those with costs in U.S. dollars or that are U.S.-dollar linked).

As a non-U.S. investor, buying assets in the United States, particularlytangible assets, such as real estate, is extremely inexpensive during periods of falling dollar values. Because foreign currencies can buy more assets than the comparable U.S. dollar can buy in the United States, foreigners have a purchasing power advantage.

Finally, investors can profit from a falling U.S. dollar through the purchase of commodities or companies that support or participate in commodity exploration, production, or transportation.

The Bottom Line

Predicting the length of U.S. dollar depreciation is difficult because many factors collaborate to influence the value of the currency. Despite this, having insight into the influence that changes in currency values have on investments provides opportunities to benefit both in the short and long term. Investing in U.S. exporters, tangible assets (foreigners who buy U.S. real estate or commodities), and appreciating currencies or stock markets provide the basis for profiting from the falling U.S. dollar.

Profiting From a Weak U.S. Dollar (2024)

FAQs

Profiting From a Weak U.S. Dollar? ›

Profiting From the Falling Dollar

Who benefits from a weaker U.S. dollar? ›

A weaker dollar also makes U.S. goods and services (and assets) relatively less expensive for foreign buyers, which benefits U.S. producers that export goods.

What is a weak dollar good for? ›

A weak dollar is not necessarily bad, nor is a strong dollar necessarily good. A weak dollar makes imported goods more expensive for American consumers to buy, but it makes American goods a relative bargain abroad.

What stocks do well with a weak dollar? ›

10 Best Stocks To Buy For A Weak US Dollar
  • International Business Machines Corporation (NYSE:IBM)
  • McDonald's Corporation (NYSE:MCD)
  • The Boeing Company (NYSE:BA)
  • Newmont Corporation (NYSE:NEM)
  • Caterpillar Inc. (NYSE:CAT)
Nov 1, 2022

What happens to the company's profits if the dollar strengthens what if the dollar weakens? ›

That is because when the dollar is strong, foreign sales will convert into fewer dollars and thereby lower profits, and that often leads to falling stock prices, and vice versa.

How to profit from dollar collapse? ›

Investing in U.S. exporters, tangible assets (foreigners who buy U.S. real estate or commodities), and appreciating currencies or stock markets provide the basis for profiting from the falling U.S. dollar.

Why is a weak dollar good for stocks? ›

A weaker dollar means some foreign consumers and governments get more dollars for every unit of their home currency, which means they can afford to buy more goods and services from U.S. companies.

What is the strongest currency in the world? ›

The Kuwaiti dinar is the strongest currency in the world, with 1 dinar buying 3.26 dollars (or, put another way, $1 equals 0.31 Kuwaiti dinar). Kuwait is located on the Persian Gulf between Saudi Arabia and Iraq, and the country earns much of its wealth as a leading global exporter of oil.

What happens to your house when the dollar collapses? ›

A collapsing dollar typically leads to inflation, which can inflate your home's nominal value but also increase everything else dramatically. This means while your home might be worth more on paper, everyday expenses like groceries, utilities, and repairs become so much more expensive.

What is the weakest currency in the world? ›

What Is the Weakest Currency in the World? The weakest currency in the world is the Iranian rial (IRR). The USD to IRR operational rate of exchange is 371,992, meaning that one U.S. dollar equals 371,922 Iranian rials.

What should I own if a dollar crashes? ›

What To Own When the Dollar Collapses
  • Traditional Assets. ...
  • Gold, Silver, and Other Precious Metals. ...
  • Bitcoin and Other Cryptocurrencies. ...
  • Foreign Currencies. ...
  • Foreign Stocks and Mutual Funds. ...
  • Real Estate. ...
  • Food, Water, and Other Supplies. ...
  • Stability and Trust.
Dec 14, 2023

How to protect your money from dollar collapse? ›

What to Do Before the Dollar Collapses? Though the U.S. dollar collapsing is unlikely, ways to hedge against it include purchasing the currencies of other nations, investing in mutual funds and ETFs based in other countries, and purchasing the shares of domestic stocks that have large international operations.

What happens to gold when the dollar collapses? ›

Gold usually rises when the U.S. dollar loses value as investors seek to protect their wealth. As such, investing in gold future contracts can help investors protect their portfolios from the effects of a U.S. dollar collapse.

Will USD weaken in 2024? ›

We expect 2024 to be a year of diverging trends for the dollar. It will likely move lower on a broad trade-weighted basis early in the year but stabilize as the year progresses. Although we expect a general downward drift for the dollar, performance of individual currencies will likely vary widely.

Who would not benefit from a stronger U.S. dollar? ›

A strong dollar is good for some and not so good for others. A strengthening dollar means U.S. consumers benefit from cheaper imports and less expensive foreign travel. U.S. companies that export or rely on global markets for the bulk of their sales are financially hurt when the dollar strengthens.

Who is hurt by a weaker dollar? ›

A falling dollar diminishes its purchasing power internationally, and that eventually translates to the consumer level. For example, a weak dollar increases the cost to import oil, causing oil prices to rise. This means a dollar buys less gas and that pinches many consumers.

Who benefits from the U.S. dollar being stronger? ›

Countries that have borrowed in dollars also face higher interest bills. There can be benefits for some foreign businesses, however. A strong dollar benefits exporters that sell to the United States, as Americans can afford to buy more foreign goods and services (including cheaper vacations).

What happens if the dollar devalues? ›

Devaluation may result in an increase in the cost of imported commodities and raw materials, which is known as imported inflation. This might weaken consumers' purchasing power and lower their standard of living by increasing inflationary pressures in the country.

What are the benefits of the U.S. dollar dominance? ›

Hirt: Having a dominant global currency provides ample demand for our debt instruments, which benefits U.S. companies and consumers through liquidity and stability of their currency. It further allows them to theoretically borrow at rates lower than what's available in the rest of the world.

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