The Weak Dollar and Investors

The dollar may have hit bottom (as I wrote recently) and that has many implications for investors. If true, it means unhedged international stock holdings won’t be giving U.S. investors the same currency benefits they’ve received in the past few years (as the dollar value of their international holdings moves higher). A stabilized dollar would also mean that big U.S. multi-nationals stop seeing a currency boost to earnings every quarter (from overseas profits that look better when priced in dollars). But even if the dollar stops its slide, it doesn’t mean that the basic dynamic has changed: The dollar is cheap, and is likely to remain that way for a long while. (Especially if China and other Asian countries devalue their currencies.) So while the dollar’s slide may be over, we’ve only begun to see the long-term effects of a cheap dollar on, for example, U.S. exporters. Tim Worstall says he’d be “surprised if the U.S. isn’t running a trade surplus” in five years. One obstacle to that prediction coming true: For a long time, the strong dollar made exporting from the U.S. difficult, contributing to the decline of American manufacturing. Can small- and mid-sized U.S. firms start thinking globally again? Presumably many large firms are already looking everywhere around the world for opportunities. For smaller U.S. firms, profiting from the weak dollar might require a change in mindset. That could take a while. A good investing strategy from all this? Seek out smaller U.S. firms that are gearing up export businesses, companies with management teams savvy enough take advantage of a cheap dollar to compete globally.

(For more: A good recent take on the implications of a weak dollar by BusinessWeek colleague Peter Coy is here. And this, from the Chicago Fed, gives some basic background on the issue.)

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