If you’ve been paying attention to the financial news, it seems all anyone wants to talk about is how the strong US dollar is bolstering business and boosting the economy. That makes for a great sound bite and gives people plenty of reasons to feel positive about their personal finances, but there’s a lot more to the story.
How strong is too strong?
“Strong” is a word we love to hear when it comes to the stock market. But when it comes to the almighty dollar, things get a bit more tricky. There are times when “strong” can be “too strong.” Here’s why:
• A stronger dollar gives US consumers and businesses greater buying power in foreign markets. But while we’re all paying less for imports, foreign companies and consumers are paying more for US exports. This means they buy fewer US goods and services—which hampers US economic growth and decreases employment.
• On the flip side, when the dollar is weak, US consumers and businesses pay more for foreign imports, and foreign entities pay less for US exports. Because foreign companies can afford to buy more US goods and services, US production and employment get a boost.
So how strong is too strong? When the foreign exchange rate reduces US sales. Just ask Procter & Gamble’s CFO. Last week he told CNBC the company expects net earnings to be down 12% in 2015 as a result of the strong dollar. Why? When the dollar climbs high enough to deter foreign purchasing, US exports can be quickly outpriced by foreign bidders. This means that when a manufacturer in Vietnam (a fast-growing player in the global electronics supply chain) is purchasing electronic components, Hewlett-Packard Co.—one of the largest manufacturers in the US—may be outbid by a supplier in China, simply based on the strength (or lack thereof) of the Yuan. It also makes the US a less attractive (read affordable) travel destination for visitors from Europe and Asia, which has a huge impact on our economy.
Balance equals harmony
Ultimately, balance is best. A strong dollar is an important signal that the world recognizes the relative strength of the US economy, so we have that going for us. Cheaper imports and fantastic travel bargains are wonderful, but you have to ask yourself: if a strong currency is so desirable, why are the EU and Japan spending literally trillions to weaken their currencies?
The dollar is going to be what it’s going to be, and only time will tell how this balance plays out. The best thing to do in the mean time is to make the most of the current situation. From a portfolio perspective, I’ll certainly be keeping my eye on commodity stocks and emerging markets that are at some risk due to the strong US dollar, and I’ll continue to watch for new opportunities for growth—both in the US and abroad. In keeping with my long-term approach, I’ll continue to seek, above all, balance.
To take advantage of the strong dollar in a very personal way, if you’ve been itching to take a trip to Europe, this would be a great time to go. Anne and I are setting a good example: we’re heading abroad for a dual celebration of Anne’s 50th birthday and our 20th wedding anniversary. Hopefully we’ll run into you in a little pub in Ireland where we’ll all be getting much more Guinness for our Euros!
Questions about how the strong dollar impacts your own financial outlook? Email me and we can schedule a time to dive into more detail. I’m here to help.