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How a Weaker Dollar Affects Your Portfolio

After a decade of nearly uninterrupted gains, the dollar sank
precipitously all summer against a basket of foreign currencies.

We rarely worry about whether the dollar is strong or weak relative to other foreign currencies, unless we have plans to travel abroad and need euros, yen or pesos (although we’re not doing much of that lately). Even so, moves in the dollar can affect your portfolio in surprising ways, says Nellie S. Huang, Kiplinger's Personal Finance.

After a decade of nearly uninterrupted gains, the dollar sank precipitously all summer against a basket of foreign currencies. The greenback stabilized in September, however. Overall, from the start of the year to mid-November, the dollar is lower by 3.7%.

But many strategists expect the U.S. currency to fall into a more persistent decline over the medium-to-long term, thanks in part to low interest rates that the Federal Reserve has signaled will stay low for at least three years. “Mounting budget deficits, an expanded Federal Reserve balance sheet and an increased money supply” are weighing on the dollar, too, says Chao Ma, a global strategist at Wells Fargo Investment Institute. “We expect the U.S. dollar to stay in a structural bear market.”

A weakening dollar can be good for certain investments. U.S. companies that generate a significant chunk of revenues abroad will get a boost from the weaker dollar as money made overseas is converted into greenbacks. When the buck is weaker relative to the euro, for example, the profits that sporting goods giant Nike makes in Europe will translate into more dollars when the firm repatriates those earnings. U.S. firms that export products overseas gain from a weaker dollar, too, because their goods become relatively less expensive for customers overseas.

Other kinds of investments can profit as well. U.S. investors in foreign stock funds benefit because when a foreign stock rises in price or pays a dividend in its local currency, that investment gain gets translated into dollars. Consider the performance of the MSCI EAFE index during the recent dollar decline. Over the nearly three-month period this summer when the dollar was weakening most, the index, which tracks stocks in foreign developed countries, gained 5.8% priced in local currencies. Converted into U.S. dollars, the index gained 10.9%.

And then there are commodities, whose prices tend to move inversely to the dollar. Because many are priced in dollars, a weak greenback typically means higher relative commodity prices. A lower dollar also fuels demand overseas, says Katie Nixon, chief investment officer at Northern Trust Asset Management. “Foreign buyers purchase U.S. commodities such as corn, soybeans, wheat and oil with dollars. When the value of the dollar drops, they have more buying power.”

Editor’s Note: Nellie S. Huang is senior associate editor at Kiplinger’s Personal Finance magazine,

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