Weak Dollar Investing

500 Paper Airplane - CroppedCurrencies are closely tied to the economies and identities of countries. This is apparent in the United States, where prolonged weakness of the American Dollar has sparked debates across financial and political circles.

Aside from bureaucratic issues; the strength of a currency affects wages, cost of consumer goods and national pride, among other factors.

These effects extend to investment portfolios susceptible to the currency risk of a falling dollar. However, there are several options that help protect portfolios against a weak currency.

Investments that can benefit from a weak dollar include:

Domestic Stocks of Export Driven Companies:

Weak dollar investing may include American businesses that have a large percentage of overseas sales.

With a weak dollar, these companies can competitively price their products and services in foreign markets to increase market share.

Export oriented companies also enjoy favorable exchange rates when converting stronger currencies from international sales into dollar values.

The technology and energy sectors are among several industries that gain a large share of revenues from foreign sales.

International Stocks:

International equities help reduce the foreign exchange risks of a wholly domestic stock portfolio.

Foreign stocks denominated in overseas currencies can provide added returns when converted to dollar values. Since several countries have pegged their currencies to the U.S Dollar, not all foreign equities will offer this benefit.

Investment Managers such as Elliott Broidy have brought attention to overseas investing in markets that were seldom followed in past years.

Smaller investors may seek out mutual funds or exchange traded funds (ETFs) that invest abroad. Many ETFs have affordable share prices and multiple mutual funds have low investment minimums. This makes it convenient and economical to gain international stock exposure with professional management.

Foreign Government Bonds:

Fixed income securities that pay interest in foreign currencies can hedge against a falling dollar.

Otherwise known as sovereign debt, these bonds are backed by repayment guarantees from the issuing governments. Despite this assurance, foreign bonds can default and investors should evaluate the risk/reward profile of each situation.

Since most foreign treasuries have lower credit ratings than American bonds, international debt often has relatively high coupons, particularly in developing countries.

International Corporate Bonds:

Interest payments from foreign corporate debt can be more profitable when converted to dollars.

Many brand name companies are based overseas and issue bonds to raise capital for their operations.

Much like governments, corporate bonds are assigned credit ratings from agencies. Lower rated corporate debt will require higher interest rates to reward investors for assuming greater risk.

Summary:

A falling dollar has an impact on everyday living and investment returns.

As companies across the world turn to overseas markets for sales and sources of capital, currency values will continue to affect investment performance.

Weak dollar investing offers several choices that can help investors reduce portfolio risks and increase returns.

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