A weak U.S. dollar can be good for many exchange traded funds (ETFs). For example, a low dollar benefits foreign currency ETFs that go up as we go down. Precious metals, such as gold and silver, tend to benefit when the dollar drops because investors see them as solid safe havens. However, a falling dollar can be bad for the overall economy. Here’s seven reasons why, according to Carl Delfeld for ETF XRAY:
- A weaker dollar translates into a cut in the real spending power of American consumers, which means a reduction in real income.
- A weaker dollar weakens the role of the U.S. dollar as the world’s reserve currency. Why should investors and central banks around the world invest in U.S. assets when their value is steadily declining?
- The chances of a weaker dollar leading to a sharp reduction in America’s trade deficit is highly unlikely since 40% of the current deficit is due to oil imports that are denominated in U.S. dollars. An additional 20% is due to trade with China, which is controlling the value of its currency.
- A low dollar is inflationary because it increases the cost of imports.
- Business leaders know that discounting prices might bump near-term revenue and profits but at a real cost to long-term profitability, not to mention inflicting damage to the brand name. This essentially is what we’re doing to the "brand of America" by trying to increase exports by lowering their price in the global marketplace. Better to stand firm on price and sell superior quality, innovation and service into global markets.
- Investors seem to like a weaker dollar since the profits of American multinationals get a boost from foreign earnings being translated into U.S. dollars. This is short-term thinking because most multinationals have sophisticated treasury departments that hedge currency exposures.
- A weak dollar encourages American and international investors to invest in non-American markets. The more the dollar drops, the more global equities rise. Many Asian currencies are hitting record highs against the U.S. dollar. The Australian dollar has climbed to a 25-year high, while the Singapore dollar has touched a 10-year high.
According to EPFR Global, investors are pouring money into global funds while taking money out of U.S. equity funds. Foreign investors reduced their holdings of U.S. securities by a record amount as the credit squeeze intensified, according to the latest Treasury figures. The Treasury said net sales of U.S. market assets – including bonds, notes and equities – were $69.3 billion in August after a revised inflow of $19.5 billion during July. The August outflow exceeded the previous record decline of $21.2 billion in March 1990.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.