Over the last year the Dollar has appreciated nearly 22% versus the world’s currencies.  With forecasts for continuing Dollar strength, what’s the next move for investors?

Bottom Line

US currency strength is providing a tail wind for our financial markets. Investors worldwide are rushing to invest in our country. 

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Just look at the last 12 months: Overseas investors got as much as 36% from the S&P 500, adding together both index and currency movement.  Short term oriented investors may increase their bets on US financial assets and domestically oriented companies as a result.

However, the strong Dollar is adversely affecting US multinationals’ earnings.  Their exports denominated in Dollars are less competitive, while earnings generated overseas are worth less.  So, in the near term be cautious on the earnings power and hence stock appreciation potential of these companies.

Longer term investors might want to bet against the recent Dollar strength and investment beneficiaries; to the extent that investors have overlooked fundamentals to chase simply due to currency movements there may be opportunities.

Future currency movements are extremely difficult to predict.  Currencies move in response to economic conditions, geopolitical events, governmental policies, and investors preferences, none of which are easy to fathom.  

Strong Dollar Depresses Value of Multinationals’ Overseas Operations 

40% of the S&P 500 revenues come in from overseas. Dollar strength makes exports pricier, and reduces the value of foreign earnings.  That’s one of the reasons to expect an weak corporate earnings in 2015’s first half.

The exact effect on any one company may vary.  Some companies hedge currency exposure.  Others manufacture overseas, reducing exposure to Dollar appreciation.

Mighty Dollar Reduces the Value of Overseas Investments

Overseas investments have struggled to remain competitive for US investors.  Obviously their shares, and perhaps much of their profits and operations are denominated in depreciating currencies.  

However, opportunities may exist where overseas companies actually do more of their business in America.  Any sell off due to their headquarters being overseas may be unwarranted.  The opportunity may be even greater if the manufacturing is being done abroad, before exporting to the US.

Currency Forecasts Notoriously Tricky

The old saw is that there are only two economists who genuinely understand how currencies move, but that they disagree on the future direction.

Currency movements are partly a product of economic fundamentals:  Economic strength and lower inflation makes a currency attractive.

But, currency strength or weakness is also influenced by governments.  Today, many governments want a weaker currency, to stimulate demand for their exports.  Meanwhile, central banks will try to manipulate currency rates to better target their traditional objectives of high employment and low inflation.

The upshot is that making investments based on your predictions of currency movements is, well, a crapshoot.  Your opportunity is to take advantage of bargains created by those who think they can predict.

Strong Dollar May Keep the Fed on Hold

Our Federal Reserve has twin mandates:  Keep inflation low and employment high.  Its primary tool is manipulating interest rates:  Low rates stimulate the economy and employment but potentially exacerbate inflation; high rates do the opposite.

A strengthening currency is similar to higher rates.   To the extent the US Dollar strengthens, it must make the Federal Reserve more cautious about raising rates.

When you consider when interest rates might rise and how that might impact your portfolio, realize that our currency’s strength may delay that rise.

Strategy for Longer Term Investors

With the prevailing wisdom that the recent Dollar strength US can only continue, relative bargains abound in sectors harmed by that strength.   Think big exporters like technology, commodity/energy based firms, plus groups that might benefit from higher rates, like financials.

Conversely, be skeptical of sectors that have attracted lots of interest as being “domestic plays”, like utilities, retailers, and restaurants. 

Note: David G. Dietze, JD, CFA, CFP™ is Founder, President and Chief Investment Strategist of Point View Wealth Management, Inc., a registered investment advisor at 382 Springfield Avenue, Summit.  CNBC has named Point View number 5 on its list of the top 100 American fee-only wealth managers.  See http://www.cnbc.com/id/101619698  The full-length version of this article is available at:  www.ptview.com.