How the Dollar’s Value Affects Your Investments

August 19, 2008

The dollar: it’s up, down, steady, weak or strong compared with foreign currencies. Simple terms, but what do they really mean for your investments?

The use of these terms indicates just how small the world has become. In 1980, our national economy essentially performed as though it were relatively untouched by economic developments throughout the world. Today, the performance of the U.S. economy is much more closely linked to those of other nations, as well as to developments in their governments and financial markets.

While many factors influence whether the dollar is strong or weak versus the Japanese yen, the British pound, or the euro, three are key:

· the strength of our economy versus those of other nations

· the political stability of the respective governments

· comparative interest-rate levels here and abroad

For example, during the early 1980s, our economy was much stronger than those of our trading partners, while interest rates soared as a result of an influx of foreign purchases of American products and investments in U.S. assets. Our currency was often called the super dollar during this period.

However, the dollar began to weaken steadily in mid-1985 as the sale of costly American products dwindled abroad, while the demand for relatively inexpensive imported items rose. The stock-market crash of 1987 forced the dollar to sink even further, causing the Federal Reserve Bank, the nation’s central bank, to reduce interest rates and provide liquidity.

In times of volatile markets, it’s not uncommon to see the dollar move up or down against foreign currencies as much as 10 percent in a single week.

What does it all mean to the average investor? While short-term fluctuations have little or no impact on most individual portfolios, a dollar that is stable or rising over a longer period of time tends to attract foreign investors to the stock market; this, in turn, expands the amount of money available to buy stocks — including yours.

However, this is a good news/bad news scenario. A strong dollar leads to an exchange loss: the earnings of U.S. companies doing business abroad (and, therefore, their shareholders) lose value when foreign currencies lose value against the dollar. The greater the export activity of an American multinational company, the more it benefits from a weak dollar, which makes the company’s products more affordable to foreign buyers. This is why many financial advisors recommend multinationals as a good investment opportunity when the dollar is declining.

Interested in learning more about the dollar’s ups and downs? Your financial advisor will be happy to provide you with more insight into this interesting topic and its possible impact on your investment portfolio.


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