I’ve covered this topic previously, however, the US Dollar continues to weaken and I thought I would revisit what this means. There are pros and cons with a strong or weak dollar so let’s hit some of the highlights.
In case you missed it, the dollar is down nearly 10% this past year. This is from its high in March. It also just had its worst month in a decade.
As a reminder, when the dollar is worth less it costs more for you to buy goods from outside the US. One example I read was it will cost more for you to buy a shirt made in China sold at Walmart. On the flip side, it becomes more beneficial for shirt makers in the US. This extends beyond the US as a weaker Dollar makes products made in the US more affordable on the world market increasing their demand. In this case, you would expect exports from the US to increase.
When the current administration weakened the Dollar a couple of years ago the US trade deficit actually increased. Yes, even though it was cheaper to export we ended up continuing to import more than we exported. With the current weaker US Dollar we actually just decreased our trade deficit as we exported more than we imported for June. It’s hard to say it was because of the weaker US dollar as overall global trade is down significantly. It at least went in the direction it should have with a weaker Dollar.
What does this mean for stocks? Well, if US goods continue to be cheaper due to a weakened Dollar we should continue to see more purchases of US products by foreign markets. Now, this doesn’t necessarily mean you have to go out and change your portfolio around to prepare for this. The last full year’s data I saw showed that just under 50% of the S&P500 sales came from non-US markets. Some industries do better here such as tech companies who sell a lot of their product abroad. Other industries, such as utilities are more dependent on US sales only.
So, if you were planning on taking a trip outside the US your US Dollar may not stretch as far as it would have a year ago. However, your investment portfolio may actually be liking a weakened Dollar. Plus, I’m not sure how many countries Americans can even travel to right now.
Let’s jump back to a weak dollar making US products more competitive. This is true. It is also true it can lead to inflation, especially as it comes to rising commodity prices and imports. Rising inflation can lead to the Fed raising interest rates. While those of you complaining about your CD rates paying nothing may appreciate that, higher rates hurt when it comes to paying back debt, like the US Government has quite a bit of.
The relative strength of the dollar may not seem that important, but it has a tremendous impact on the overall health of the US economy and the market too. While you may want to know what Bitcoin and other hot stocks are doing, don’t forget what is happening with the quiet guy in the corner – the US dollar.