1. A strong dollar is front and center
The U.S. dollar’s value has been rising steadily since the early 1980s. In fact, the greenback has gained about 20% over the past five years alone. And while many investors have welcomed the strengthening currency, others have expressed concern that the rise could eventually hurt their portfolios.
2. What does a stronger dollar mean?
A stronger dollar means higher prices for imported goods and lower prices for exports. That’s because the dollar represents the world’s reserve currency, meaning its value affects how much people around the globe want to hold dollars instead of other currencies. As a result, demand for the dollar rises, driving down its exchange rate.
3. Why should investors care?
Investors who own foreign stocks and bonds may feel the pinch if the dollar continues to strengthen. If the dollar appreciates enough, it could make those assets less attractive to buyers. Conversely, a weaker dollar could boost the appeal of U.S. companies’ overseas operations.
4. How do investors protect themselves?
If you’re concerned about the impact of a stronger dollar on your portfolio, consider these steps:
* Buy foreign-based securities. Foreign stocks tend to benefit from a weak dollar because they often trade at a discount compared to U.S.-based counterparts.
* Consider investing in emerging markets. Emerging market economies tend to benefit from a stronger dollar because they rely heavily on international trade.
* Keep an eye on interest rates. Higher interest rates help keep the dollar stable.
5. What else should investors know?
While the dollar’s strength is a good thing for some investors, it’s not necessarily a positive for everyone. Here are four things to watch out for:
* Rising interest rates. Interest rates are likely to climb if the dollar keeps gaining ground. Higher borrowing costs could slow economic growth and dampen corporate profits.