Implications of a Weak Dollar

 

Written Commentary:

With a budget deficit of more than $1.25 trillion, outstanding federal debt at an unprecedented level of more than $6.75 trillion and lackluster interest rates, many investors wonder how this may affect their everyday lives.  While you have every right to be concerned over these huge numbers, a weakened dollar is not necessarily a bad thing.  Basically, if you both earn and spend your money in the United States, a falling dollar isn’t the end of the world.

In the past few weeks, the dollar has strengthened, albeit slightly, as a result of the economic crisis in Europe. Generally, when inflation is in check, attractive interest rates are available, and gross domestic product is healthy, a country should have a strong or strengthening currency. With our short-term interest rates hovering around 0% to 0.25%, our currency’s strength is a reflection of the strength of our financial system and the world’s belief that the United States will not default.

When a dollar is worth less than foreign currencies, goods manufactured in the United States are cheaper to purchase, so we will often see our exports increase. It encourages Americans to buy domestic as well.  Longer-term, a weak dollar can begin to help the dollar recover as more consumers will seek to purchase dollar-denominated goods.  More importantly, U.S. producers will need to match the increased demand with additional capacity, which should lead to more employment. Travel and tourism to the United States often increases, because foreigners can get more for their money here. 

A weak dollar also has its detriments. Raw materials and commodities become more expensive, especially, if they are imported. Companies, pretty much across the board, are paying higher prices for the inputs to their finished goods, forcing many of these companies to pass along higher prices to the consumer.  Most commodities are sourced outside of the United States, further magnifying the impact of the high prices on domestic consumers.

International companies are generally a good hedge against a weakening dollar. Their sales, denominated in foreign currencies, become more valuable when translated into weaker dollars. We suggest you consider companies that operate in international markets, as their earnings can increase as a result of a strong currency elsewhere. These companies do not have to grow operating earnings or foreign operations to post profits.

Ultimately, we feel investors shouldn’t worry as much as they do about a weak dollar, especially with the current crisis in Europe. If the eurozone countries were to return to their former currencies we feel the dollar would likely strengthen, or at least remain at an optimum level to other currencies for a while.

One of the reasons the U.S. dollar is the world’s currency of choice is that our financial system has a good transparency and liquidity. Our dollar is being managed weaker by the Federal Reserve to increase gross domestic product and encourage economic growth. We feel as soon as there is growth in the economy, the Fed will raise interest rates and the dollar will strengthen.

Disclosures

This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.